The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: retireatbirth on April 16, 2015, 05:43:13 PM
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Let's all predict the market's (S&P 500) next 10%+ dip...
1. When will the dip occur?
2. What will the magnitude of the dip be (% diff between high and low in a 3-month window)?
3. Which sector will fall hardest?
4. What/who will CNBC "blame" for the dip? (subprime auto lending, fed policy, etc.)
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1) In the future.
2) At least 10%.
3) The one with the most panicked selling.
4) Obama.
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1) In the future.
2) At least 10%.
3) The one with the most panicked selling.
4) Obama.
+1
Forummm beat me to it.
I'll pretend speculate slightly more.
3) Healthcare. (It is might highly priced right now.)
4) Obamacare, or the ending of subsidies if the Supreme court kills those.
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Man, if I could predict that I'd be busy creating a trading strategy around it, not telling you!
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In my perfect world, the dip starts tomorrow. We would have a "significant but not catastrophic" recession, maybe a 15-20% drop in the S&P500, which would start in mid 2015, bottom sharply in 2016 then partially recover and hold for a while, and be notably on the road to recovery by the close of 2017. Then I want another five years of 10%+ returns from 2017 to 2022.
Tech and healthcare will have to take a hit, valuations are just too high, but I think it will be a broad selloff and most of the blame will be attributed to the little guys. It will be the anti-Occupy movement, blaming irrationally defensive consumers for driving down holiday spending instead of the major corporations who are sucking cash out of the system. Rather than highlighting that Apple's $200 billion in cash is currently sitting in a checking account rather than driving economic productivity, they'll blame the Apply fanboys for not buying enough of the last three iThings.
It's been a while since we had a good round of "Let's Blame The Poor" so I think we're due.
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LOL c'mon jcollins has his own stock predictions contest for fun so can't we get some good ol speculation here too?
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LOL c'mon jcollins has his own stock predictions contest for fun so can't we get some good ol speculation here too?
Isn't that what this whole thread is? And didn't you start it?
/confused.
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It's not a question worth giving an actual answer to, but I think it's a good philosophical question for people to think about for themselves.
Because I've been feeling lately that a lot of people have a subconscious recency bias telling them "a market crash is a deep dive quickly followed by a long and steady bounce back up", just because that's what the last two major market crashes have looked like. The more you believe that, the less likely it will be that the next crash resembles the previous two, because the universe likes to fuck with you like that. Our species has an incredible pattern-recognition processor built-in, but using it on input that had no part in its evolution can lead to some incredibly wrong answers.
I may be reading invisible subtext, but I hear that bias when people talk about hoping for another crash so they can "buy stocks on sale". In general, people just seem to have more confidence in post-crash bounce-backs than they ought to, like a crash is just some "irrational" thing that the market will quickly and inevitably correct.
In 1972, the inflation-adjusted, dividend-reinvested S&P 500 lost ~50% of its value in a 2-year slide, almost identical to the crashes in 2000 and 2007. But the similarities end there, because that time, the post-crash bounce-back stalled after a year. In 1982, seven-and-a-half years after the 1974 bottom, your investment was still down 37% from its 1972 value. You wouldn't have returned to your break-even point until 1985, after a full twelve years in the hole. That's a longer period of time than an entire Mustachian career, so all of your "buying low" wouldn't have done anything to help you retire earlier. Contrast that with the recovery from the 2007 crash, which took only five-and-a-half years.
So I have no idea what the next crash will look like, but I wouldn't bet much money on it looking like the last two.
(http://i.imgur.com/dHjbYAH.jpg)
And look, I didn't even have to invoke Japan!
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...awesome data and stuff...
BOOM!
Thanks for reigning in my human pattern-recognition. I always forget about things like stagflation and the ridiculous period after the 1929 crash.
PS Japan!
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LOL c'mon jcollins has his own stock predictions contest for fun so can't we get some good ol speculation here too?
Isn't that what this whole thread is? And didn't you start it?
/confused.
Yes, but the replies are lacking in wild speculation with strong conviction.
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LOL c'mon jcollins has his own stock predictions contest for fun so can't we get some good ol speculation here too?
Isn't that what this whole thread is? And didn't you start it?
/confused.
Yes, but the replies are lacking in wild speculation with strong conviction.
Someone didn't get the memo about outrageous optimism or how to view investing. ;)
All joking aside that truly is why the replies are lacking what you seek. There is no value in considering the question outside of what skyrefuge has posted, which is more of a consideration of our preconceived notions of what a 10% drop looks like overall rather than a guessing game on when it will happen and who gets hit hardest.
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LOL c'mon jcollins has his own stock predictions contest for fun so can't we get some good ol speculation here too?
Isn't that what this whole thread is? And didn't you start it?
/confused.
Yes, but the replies are lacking in wild speculation with strong conviction.
Oh. You may be on the wrong forum.
Most of us aren't too interested in that.
I'm sure some doomer/prepper forums would love a thread about what the next correction will look like. We don't really care, cause it's a win-win either way (high net worth if no crash, buying low if crash). We'll take things as they come, and be grateful. :)
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I hear that bias when people talk about hoping for another crash so they can "buy stocks on sale".
Great post Sky, it's important to understand that timing the "bounce" is just as much speculating in market timing as guessing when the crash will happen.
In the 2008 crash, I got nervous about the run up a few months before it happened, and moved my portfolio 100% into short term bonds. But I got back in too soon - moved 100% into stocks before the bottom, and as a result I lost about 40%. I missed out on a few months of the run up, and then I got back in too soon and still suffered a big part of the drop.
Learned my lesson the hard way and now I pick the asset allocation I want and stick to it. But, it doesn't stop me from feeling anxious about the next selloff. I just do a better job of resisting my anxiety.
Or, at least that is what I tell myself. We really won't know until the next correction hits.
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Apologies for continuing to take what was intended to be a lighthearted thread in a serious direction, but to counterbalance the sobering reminder outlined in skyrefuge's post, keep in mind that our style of early retirement planning is designed to protect against 1972-like near-worst-case scenarios. Although 1972 represents one of the few historical retirement start years to have resulted in failure for the retiree following a standard 4% WR plan, the exercise of even a modicum of flexibility would have saved the retirement from failure (and, as we all constantly like to remind ourselves, surely none of us would have stared that initial decade of poor returns in the face, dared it to thwart our iron-clad retirement plan, and continued to robotically draw down fixed constant-dollar amounts from our portfolio without seeking supplemental income or taking other corrective action). So, we should all be fine even if our collective retirements happen to commence in a 1972-like nightmare scenario. Yay optimism!
On the other hand, a plurality (I think?) of leading experts believe we are in such a nightmare scenario, with all signs pointing to subpar market returns over the next several decades. So we shouldn't derive false confidence from the outrageous success of our intended retirement plans in the past, given that we may very well be in a market environment poised to be as bad as or worse than any in history. Yay pessimism!
On the other other hand (I have more hands than a Hindu goddess), as skyrefuge observed here (http://forum.mrmoneymustache.com/investor-alley/using-market-valuation-measurements-to-affect-swr/msg597846/#msg597846), the last few decades have been much kinder to valuation indicators like CAPE than earlier historical periods, so maybe we're still poised for wildly successful retirements after all! But wait, isn't this just another form of recency bias? Why trust the story of the last three decades over that of the ten that came before them? For that matter, why trust the last century and a half when we have several millennia of modern human history to look to?
So what's the takeaway? For me, it's "be flexible and hope for the best, but don't necessarily plan for the worst." The recent artificial intelligence threads highlighting the serious potential for the occurrence of world-changing dislocations in the near future have me reevaluating where to draw the line on what constitutes prudent planning versus indulgence of false precision.
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So I have no idea what the next crash will look like, but I wouldn't bet much money on it looking like the last two.
(http://i.imgur.com/dHjbYAH.jpg)
And look, I didn't even have to invoke Japan!
Sky - most people don't factor inflation as highly as they should (as the main danger to their wealth), and to your point, a major reason why the market has done so well after the last two crashes was because inflation was low - I think because the US has had dealings with the inflation specter already and the Fed has it in its crosshairs constantly, real returns won't suffer like they did from the 70s to the mid 80s, however, nominal returns before inflation will still be lower than post 2001 or 2009, just because there's more money in the system, pushing up price ratios
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I wish someone aggregated all the brilliant posts. I'd nominate brooklynguy's.
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*Extremely flattered*
But seriously, that is a good idea and I wish someone would really do that. There are a handful of posters whose posts I try to follow religiously because of their superb content (so I periodically click on their names and read all their posts the way I would a blog), but the problem is that this forum has too many such brilliant posters and it's impossible to keep up. A curated collection of all the must-read posts would be a godsend. But unless one of our already-FIRE'd participants wants to take up forum-curation as their fulltime retirement occupation, I doubt it will become a reality.
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Eh, give it another
10 (1, 2, 3?) years, we'll run an algorithm that can recognize quality posts and will condense it into book form. MMM won't even have to work on his own book, it will just be a crowdsourced guide to FIRE.
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I wish someone aggregated all the brilliant posts. I'd nominate brooklynguy's.
Yes, it's been interesting to watch the forum evolve. These days we have way more garbage posts from new people asking easy questions they could have answered for themselves with a simple search, but we also have a new group of really outstanding contributors that have kept me coming back.
Brooklyn and Dodge top my list, but Skyrefuge is a close third.
posters whose posts I try to follow religiously because of their superb content (so I periodically click on their names and read all their posts the way I would a blog)
Oh dear that's horrible. I can't imagine someone trying to read through my post history for content. About once a week I actually have something to say, but most of my time on the forum is just mindless drivel.
Don't we already have a FAQ thread with links to good posts on like the top 50 topics that get discussed here?
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Oh dear that's horrible. I can't imagine someone trying to read through my post history for content.
Who said you're on the list?
But seriously, as long as we're sitting around in a collective ego-stroking circle jerk, you do indeed make the cut, and in fact top my list, because of your proclivity to spew forth thought-provoking essays that read more like stand-alone articles than forum conversation posts.
I'm not going to go farther and start naming my personal rankings of posters in terms of forum-contribution-quality, except to say you're nuts if you think skyrefuge ranks below Dodge and me. No disrespect to Dodge (or myself), but the very fact that you're crazy enough to hold that ludicrous opinion lowers my own respect for your judgment by a couple of notches (unless you were kidding, which would make more sense).
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EDIT: Also, I'm not quite sure why I feel compelled to point this out (because it feeds into the "them" vs. "us" mentality that I absolutely hate (yet still can't help succumbing to, because, like all people, I have a human monkey-brain)), but in my view posters like skyrefuge (who joined the forum less than three months after its foundation) are part of the "original native group," while posters like myself (who, after several months of lurking, joined in mid/late-2013, together with a relatively small wave of others around that time) are more like second-generation immigrants who are now assimilated and firmly entrenched in the community, while those joining much more recently are closer to being fresh off the boat.
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I wish someone aggregated all the brilliant posts. I'd nominate brooklynguy's.
Maybe... http://www.simplemachines.org/community/index.php?topic=485528.0
Or this... http://custom.simplemachines.org/mods/index.php?mod=864
I still just enjoy getting schooled by all of you, trying to comprehend and retain the knowledge that is provided here is a feat of it's own.
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I also read all the posts of certain users here through the "Show Posts" function on the person's profile. To assuage sol's concern, I should say that I don't expect every post I read from these users to be amazing such that it would disappoint me if they are not. It's more that I don't want to miss anything particularly interesting.
As for aggregation, I have been thinking for a while that I should aggregate and revise some of my posts and post them on a website under my control at some point. This would only include my own posts, but not because I think my posts are the only ones worth reading on the forum. It would only include my own posts because I would plan to make significant edits to them (and because I wouldn't republish somebody else's writing without their permission). For example, my posts often contain propositions that are not fully explained and for which no reference is provided. Sometimes I throw in a reference to a concept with with no exposition whatsoever. These instances of laziness are not really oversights, but there is a limit to how much time I'm willing to invest into a given post, so sometimes I abridge things. However, in the collected edition of my content here, I would want to fully flesh out everything, including providing more extensive bibliographies, and probably add sufficient context so that every post can be read as an independent essay without the context of the forum -- and ideally, ensure that every collected post provides information of use to future internet searchers.
I already have a number of websites with their own content, including a personal website/blog. However, the latter website currently only contains essays on computer science topics and links to a variety of computer-related work I've done. It's not entirely obvious how to expand it to cover the range of topics I've written about here in the posts of which I am most proud (often tax law posts, but I'm also proud of some posts I've made on other topics). I would have to decide between expanding the existing blog -- perhaps by breaking it up into categories based on subject -- or starting a new one, although I'd probably lean toward expansion. I'd probably want to revise the layout of the website at the same time, and I don't really like dealing with web layout issues so it's probably something I'll put off for a while.
Given the intended scope (not just aggregating my posts, but significantly revising them), it will be a fairly large project, so I was thinking I would also write some fresh new content as well to tie everything together, perhaps some biographical material.
It may be that I don't actually get around to this any time soon. I am very lazy, after all ;). But it's good to know that there may be audience for the content. I don't know if anybody else has thought about preparing a "collected edition" of their own content here.
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Although 1972 represents one of the few historical retirement start years to have resulted in failure for the retiree following a standard 4% WR plan, the exercise of even a modicum of flexibility would have saved the retirement from failure
So, I wasn't even thinking of it in terms of retirement-survival. I was thinking of the effect of a crash on the psychology of people in the accumulation stage. Because for a retiree, there is absolutely no good to be found in a crash. Yes, a crash will almost always be survivable for a sensible retiree, and usually with nearly-unnoticeable adjustments, but "hmm, might have to cut back on the vacations, and hopefully not for too long..." is still a stark contrast to the average MMM-accumulator's perspective: "a crash? Woo hoo! Finally!"
I think that ability of an accumulator to see a silver lining in a crash is both important and correct, but I wonder if the nature of the last two crashes has misled people to expect not just a silver lining, but a whole giant pile of solid silver coins waiting for them in Scrooge McDuck's vault at the bottom of the V-shape.
Let's imagine a Mustachian accumulator who, in 2015, has been working on his Mustachian path for 5 years. He projects that with basic, ordinary 7% real returns from here on, he'll reach FI in 2020.
"Alright!! My plan is working great! Though after 5 years of investing in this bull market, what would be really great is if I got the chance to live through one of those crashes like I heard about in 2008-2009! I'm kinda jealous of the older guys who were able to take advantage of that opportunity, because that would accelerate my plans and help me reach FI even sooner than expected!"
The next year, he gets his wish, a 2008-like crash. But little does he know, he's getting served the 1970s "recovery" to go with it. Here is his thought process:
- 2016 - down 24%: "Sweet! FINALLY I get to buy stocks 'on sale'!"
- 2017 - down another 34%: "Even better! Now I'm getting stocks on SUPER-sale! This is exactly like that 2008 crash; when the bounce-back comes I'm gonna be soooo golden! (though hopefully it comes soon, because I have to admit I am a little freaked out seeing how low my portfolio balance is today...)"
- 2018 - up 30%: "Yep, the recovery's right on schedule! Though now I'm actually a little sad it didn't stay down longer, I wouldn't have minded another year to keep buying on sale..."
- 2019 - flat: "Awesome! I can't believe how this market keeps granting my wishes...a nice little pause here while halfway-recovered to allow me to continue purchasing shares at a discount before we return back up the rest of the way".
- 2020 - down 11%: "Hmm, that's not what was supposed to happen! I was kind of expecting to declare myself FI this year, but I guess I'll have to wait for next year's recovery now..."
- 2021 - up 3%: "ok, that helps a little, but I'd be FI now if I'd just gotten those 'boring' 7% returns rather than this stupid crash. :-( Well, I guess next year will be the year."
- 2022 - up 1%: "what the fuck guys, this joke is starting to get a little old... If I hadn't been adding things, my 2015 portfolio would still be down 36%, and that was 7 years ago...I'm starting to wonder if I was sold a bill of goods on this stock market bullshit. :-(("
- 2023 - up 13%: "OK! Fucking finally! If we keep going at this rate, by next year the market will be fully recovered."
- 2024 - down 10%: "FFFFFFFUUUCKKK YOUUUUUUUUU!!!!! THIS BULLSHIT IS ALL FUCKING BULLSHIT!!!! I WAS SUPPOSED TO BE RETIRED 5 YEARS AGO!!! Ok, ok, despite all this bullshit and the world dicking me over, the five extra years I've spent slaving away at a job I hate may have let me accumulate enough wealth to declare myself FI by now, but that was under THE OLD RULES. The stock market clearly doesn't work anymore as a tool to build wealth, so there's no fucking way that "4% SWR" bullshit is going to hold going forward, which makes my planned 60-year (now 55-year) retirement a fucking childish pipe-dream. I'm selling all my stocks and putting it in gold. Peace out, assholes."
Again, there's no reason to believe that 1972 crash will be exactly repeated, but there's also no reason to think a 2008 scenario is more likely to happen than the 1972 scenario. And especially not just because that's what happened most recently.
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As amusing as it was, that was painful to read.
I feel for that guy, working years longer, most likely, than the guy starting his career at the beginning of that, rather than being halfway through his career when that happens. =/
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I wish someone aggregated all the brilliant posts. I'd nominate brooklynguy's.
Yes, it's been interesting to watch the forum evolve. These days we have way more garbage posts from new people asking easy questions they could have answered for themselves with a simple search, but we also have a new group of really outstanding contributors that have kept me coming back.
Brooklyn and Dodge top my list, but Skyrefuge is a close third.
posters whose posts I try to follow religiously because of their superb content (so I periodically click on their names and read all their posts the way I would a blog)
Oh dear that's horrible. I can't imagine someone trying to read through my post history for content. About once a week I actually have something to say, but most of my time on the forum is just mindless drivel.
Don't we already have a FAQ thread with links to good posts on like the top 50 topics that get discussed here?
Yeah that FAQ was done two years ago. My context for the awesome posts was up to then. The forum has gotten much bigger than my ability to keep up with awesome posts in the intervening two years. There are several individual posters in that time that have come (some that have come and gone) that have had incredible posts which, you're right, should be in there. Compiling them seems a daunting task; seemed easier when the content was only 1.5 years worth of content from probably less than (wild speculation incoming!) 35 consistent posters, now that we've got nearly 3.5 years of material and probably a couple hundred members who've had really great posts that have come and stayed or come and gone (ignoring people who may have come out of nowhere and posted great content then disappeared after <500 posts) well... ¯\_(ツ)_/¯
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Brooklyn and Dodge top my list, but Skyrefuge is a close third.
Woo hoo! My plot to get sol to like me (by being a snarky dick to dumb people) is working!
(and thanks for including me in the "old guard", brooklynguy...I wasn't sure if sol was including me in the "new group" or not, but since I have been posting a lot more recently than I did earlier, it's understandable.)
Anyway, it seems like the bogleheads solution to the "retaining valuable posts" problem was to create a wiki. The community-nature of it distributes the workload, though in their implementation (and maybe that's just the nature of wikis) it's not exactly a pure repository of forum posts, containing the exact text and voice of the original author. But that also might just be a reflection of the difficulty of extracting a forum post from its native context and have it still make sense.
seattlecyclone (https://seattlecyclone.com/author/seattlecyclone/) did recently start the "I'm going to create a blog to use as a FAQ for these damn repeated questions" approach.
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Although 1972 represents one of the few historical retirement start years to have resulted in failure for the retiree following a standard 4% WR plan, the exercise of even a modicum of flexibility would have saved the retirement from failure
So, I wasn't even thinking of it in terms of retirement-survival. I was thinking of the effect of a crash on the psychology of people in the accumulation stage. Because for a retiree, there is absolutely no good to be found in a crash. Yes, a crash will almost always be survivable for a sensible retiree, and usually with nearly-unnoticeable adjustments, but "hmm, might have to cut back on the vacations, and hopefully not for too long..." is still a stark contrast to the average MMM-accumulator's perspective: "a crash? Woo hoo! Finally!"
I think that ability of an accumulator to see a silver lining in crash is both important and correct, but I wonder if the nature of the last two crashes has misled people to expect not just a silver lining, but a whole giant pile of solid silver coins waiting for them in Scrooge McDuck's vault at the bottom of the V-shape.
Let's imagine a Mustachian accumulator who, in 2015, has working on his Mustachian path for 5 years. He projects that with basic, ordinary 7% real returns from here on, he'll reach FI in 2020.
"Alright!! My plan is working great! Though after 5 years of investing in this bull market, what would be really great is if I got the chance to live through one of those crashes like I heard about in 2008-2009! I'm kinda jealous of the older guys who were able to take advantage of that opportunity, because that would accelerate my plans and help me reach FI even sooner than expected!"
The next year, he gets his wish, a 2008-like crash. But little does he know, he's getting served the 1970s "recovery" to go with it. Here is his thought process:
- 2016 - down 24%: "Sweet! FINALLY I get to buy stocks 'on sale'!"
- 2017 - down another 34%: "Even better! Now I'm getting stocks on SUPER-sale! This is exactly like that 2008 crash; when the bounce-back comes I'm gonna be soooo golden! (though hopefully it comes soon, because I have to admit I am a little freaked out seeing how low my portfolio balance is today...)"
- 2018 - up 30%: "Yep, the recovery's right on schedule! Though now I'm actually a little sad it didn't stay down longer, I wouldn't have minded another year to keep buying on sale..."
- 2019 - flat: "Awesome! I can't believe how this market keeps granting my wishes...a nice little pause here while halfway-recovered to allow me to continue purchasing shares at a discount before we return back up the rest of the way".
- 2020 - down 11%: "Hmm, that's not what was supposed to happen! I was kind of expecting to declare myself FI this year, but I guess I'll have to wait for next year's recovery now..."
- 2021 - up 3%: "ok, that helps a little, but I'd be FI now if I'd just gotten those 'boring' 7% returns rather than this stupid crash. :-( Well, I guess next year will be the year."
- 2022 - up 1%: "what the fuck guys, this joke is starting to get a little old... If I hadn't been adding things, my 2015 portfolio would still be down 36%, and that was 7 years ago...I'm starting to wonder if I was sold a bill of goods on this stock market bullshit. :-(("
- 2023 - up 13%: "OK! Fucking finally! If we keep going at this rate, by next year the market will be fully recovered."
- 2024 - down 10%: "FFFFFFFUUUCKKK YOUUUUUUUUU!!!!! THIS BULLSHIT IS ALL FUCKING BULLSHIT!!!! I WAS SUPPOSED TO BE RETIRED 5 YEARS AGO!!! Ok, ok, despite all this bullshit and the world dicking me over, the five extra years I've spent slaving away at a job I hate may have let me accumulate enough wealth to declare myself FI by now, but that was under THE OLD RULES. The stock market clearly doesn't work anymore as a tool to build wealth, so there's no fucking way that "4% SWR" bullshit is going to hold going forward, which makes my planned 60-year (now 55-year) retirement a fucking childish pipe-dream. I'm selling all my stocks and putting it in gold. Peace out, assholes."
Again, there's no reason to believe that 1972 crash will be exactly repeated, but there's also no reason to think a 2008 scenario is more likely to happen than the 1972 scenario. And especially not just because that's what happened most recently.
Is this where I whip out the first world problems meme? :)
Yeah a flat scenario is going to dick over that person. This is one of those things that we have to chalk up to out of our control and that the best laid plans are just that plans. They often don't work out exactly as outlined, it is important to be flexible with your outlook towards events outside of your control as much as it is to be with your spending when you're a retiree. How you respond to the events in your life is the only thing in your control in that scenario.
Plus savings rate > returns. :D
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you're nuts if you think skyrefuge ranks below Dodge and me.
Meh, tis just personal preference on the topics presented. Didn't mean to denigrate anyone's contribution, but not everyone's contributions are of interest to all posters. Cathy had put up some very detailed information that lots of people are clearly thankful for, it's just not the particular info I was looking for that day.
Such is the beauty of the internet. It's big enough to hold all of everything, even the stuff you may not be ready for just yet.
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skyrefuge's scenario just comes back to flexibility, if that individual were to stick to the plan, and get their planned principal invested, he could, being flexible, start downgrading his hours to gain more free time instead of a high savings rate... instead of saving 50-80%, he could gain 50% free time and save 10%. Sticking to your goal is more important than demanding a number. The true goal should be more free[dom]time.
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Oh dear that's horrible. I can't imagine someone trying to read through my post history for content. About once a week I actually have something to say, but most of my time on the forum is just mindless drivel.
Lol. I've actually specifically gone through and read your posts.
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skyrefuge's worst scenario is very possible. One way to prepare for it is to have a side gig that can bring in 10k or 15k a year which should not be too hard to achieve. Having a rental unit or 2 would definitely help because it is market direction neutral.
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I already have a number of websites with their own content, including a personal website/blog.
Cathy, I'm torn between asking you to share the link to your blog so I can start reading it and capitulating to the voice inside me crying out for me to stop letting my fear of missing out on good content cause me to "read the internet" to the exclusion of all other life activities.
I sympathize with the posts that periodically pop up questioning whether the commitment some of us have to this forum starts to border on unhealthy addiction (here's (http://forum.mrmoneymustache.com/welcome-to-the-forum/is-the-pursuit-of-fire-a-validhealthy-hobby/) one such thread I started myself, and here's (http://forum.mrmoneymustache.com/ask-a-mustachian/leaving-this-forum-to-keep-my-sanity/) another in which I ruminated on the very fact that my familiarity with the forum is sufficiently deep to allow me to make these kinds of internal forum cross-citations, and the irony of now citing to that thread is not lost on me).
While I miss seeing some of the old faces around here, I envy the posters who have come and gone, presumably to move on to other chapters of their lives. I want to FIRE in order to start new pursuits that don't involve staring at a screen for extended periods of the day, and I half-seriously worry that my addiction to the forum and other online content will interfere with that goal.
I lament the direction our society is headed in this Smartphone Age and the unhealthy "fear of missing out" it has created in us (a phenomenon which, apparently, has become sufficiently widespread to earn its own acronym: FoMO (http://en.wikipedia.org/wiki/Fear_of_missing_out)).
But that also might just be a reflection of the difficulty of extracting a forum post from its native context and have it still make sense.
This is what I see as the biggest obstacle to implementing the idea (aside from the problem of who's going to do the work, workload-sharing nothwithstanding, though Cathy is an obvious candidate since she clearly has the stamina to do doctorate thesis level research for every minute question that piques her interest and grandiose plans to compile and refine those posts into a feature-length blog! :-) ).
Removing posts from their native context won't just make it difficult for them to retain their meaning but will also rob them of the back-and-forth banter that made them good in the first place, except in the case of stand-alone essay posts of the type sol likes to pen.
seattlecyclone (https://seattlecyclone.com/author/seattlecyclone/) did recently start the "I'm going to create a blog to use as a FAQ for these damn repeated questions" approach.
This is great! It saddens me to see great contributors like seattlecyclone turned into workhorses charged (by themselves, albeit) with answering the repetitive questions that routinely come our way.
BTW, sorry for my part in making this the most wildly off-topic thread in forum history. I'll probably respond later to skyrefuge's tale of the unfortunate aspiring early retiree (which was terrific and, once again, sobering), but I think I've neglected my real job in favor of the forum enough for one morning--holy shit, it's the afternoon already!
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Lol. I've actually specifically gone through and read your posts.
I don't know man, that's a lot of pressure.
Posts like this one are like 95% of my contributions, and I pity the fool who wades through them looking for something of value.
Clearly I need to start my own blog. Philosophical musings about finance! Being mean to internet strangers! Puppies and atheism and family life and global climate change, with occasional hints of unpopular political opinion. Every Thursday will be taco night!
My audience would be four of you, and four members of my immediate family, and that might actually be preferable to letting me shout at the thousands of people on the mmm forum.
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Lol. I've actually specifically gone through and read your posts.
I don't know man, that's a lot of pressure.
Posts like this one are like 95% of my contributions, and I pity the fool who wades through them looking for something of value.
Clearly I need to start my own blog. Philosophical musings about finance! Being mean to internet strangers! Puppies and atheism and family life and global climate change, with occasional hints of unpopular political opinion. Every Thursday will be taco night!
My audience would be four of you, and four members of my immediate family, and that might actually be preferable to letting me shout at the thousands of people on the mmm forum.
Most of it is noise, but you offer great insight on a lot of topics. After reading through a lot of your posts i've come to value your analysis and viewpoints. Sometimes i'll see something that either I didn't originally think of, or seems off to me, but rather than dismiss it immediately I will force myself to reevaluate and consider your view point, which I don't do for most of the scrubs. I don't agree with everything you say but I enjoy reading about it.
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you offer great insight on a lot of topics.
Let me stop you before you lean in for the kiss. I really enjoyed our time together but I don't think it's going to work out between us. We're just too different; I'm a married man and you're a hairy cheesy mess.
Don't worry, there are lots of fish in the mmm sea.
(Though if you and some of the others want to get together for a little no-strings-attached group forum fun, I'm totally down.)
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you offer great insight on a lot of topics.
Let me stop you before you lean in for the kiss. I really enjoyed our time together but I don't think it's going to work out between us. We're just too different; I'm a married man and you're a hairy cheesy mess.
Don't worry, there are lots of fish in the mmm sea.
(Though if you and some of the others want to get together for a little no-strings-attached group forum fun, I'm totally down.)
And what you lack in quotation competency you make up for in humor.
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Let me stop you before you lean in for the kiss. I really enjoyed our time together but I don't think it's going to work out between us. We're just too different; I'm a married man and you're a hairy cheesy mess.
Don't worry, there are lots of fish in the mmm sea.
(Though if you and some of the others want to get together for a little no-strings-attached group forum fun, I'm totally down.)
I follow sol's posts as much for these nuggets of throw-away hilarity as for the thought-provoking poetic waxings.
Now stop sucking me back in! I have actual work to do in the job that will hopefully allow me to one day buy my freedom, but the forum just keeps calling... How ironic would it be if I lost the job that should have powered me to financial independence and early retirement as a result of my (unduly frequent) participation in a financial independence and early retirement forum?
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Clearly I need to start my own blog. Philosophical musings about finance! Being mean to internet strangers! Puppies and atheism and family life and global climate change, with occasional hints of unpopular political opinion. Every Thursday will be taco night!
I would definitely read this blog.
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How ironic would it be if I lost the job that should have powered me to financial independence and early retirement as a result of my (unduly frequent) participation in a financial independence and early retirement forum?
I would definitely read this blog.
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Again, there's no reason to believe that 1972 crash will be exactly repeated, but there's also no reason to think a 2008 scenario is more likely to happen than the 1972 scenario. And especially not just because that's what happened most recently.
Sorry to beat a dead horse, but my point is, you showed the REAL (adjusted for inflation) return of sp500 - the correct view because it counts spending power, whereas an average investor will look at his market returns without considering inflation (if we're talking about psychological impact). Using indexview again, nominal returns saw a 40% drop by 1975, then back to even by 1978, ending at 140% by the end of 1985. If the investor was sophisticated enough, he would catch on that inflation was eating his returns, but if he was sophisticated enough, he also would not panic and bail in "2024"
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Again, there's no reason to believe that 1972 crash will be exactly repeated, but there's also no reason to think a 2008 scenario is more likely to happen than the 1972 scenario. And especially not just because that's what happened most recently.
Sorry to beat a dead horse, but my point is, you showed the REAL (adjusted for inflation) return of sp500 - the correct view because it counts spending power, whereas an average investor will look at his market returns without considering inflation (if we're talking about psychological impact). Using indexview again, nominal returns saw a 40% drop by 1975, then back to even by 1978, ending at 140% by the end of 1985. If the investor was sophisticated enough, he would catch on that inflation was eating his returns, but if he was sophisticated enough, he also would not panic and bail in "2024"
But inflation would eat his returns whether he consciously realized it or not, and sky's scenario didn't have them panic bailing, but holding.
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As amusing as it was, that was painful to read.
Success!
skyrefuge's scenario just comes back to flexibility
Yeah, although in this case, I think I'm trying to highlight the need for "expectational flexibility" in addition to the "operational flexibility" that we normally talk about around here. Because operationally, my hypothetical accumulator didn't do anything wrong, until he finally snapped. And the reason he snapped is because he had failed to mentally prepare for the reality he experienced; it had not been included within the range of his expectations. He had read all the MMM cheerleading, never dug much deeper than a glance at an S&P500 price chart from 1995-2015, and wholly bought into the idea that a crash is inevitably a good thing for a Mustachian accumulator in his position.
If he had instead read my post illustrating the 1972 crash, his expectations for the outcome of a crash would have covered a broader range, and that might have given him the "expectational flexibility" to better tolerate the unpleasant outcome. Someone who is told that there might be some harrowing shit in their military training exercise is less-likely to snap when the electric-eel attack starts at 3am than someone who is just expecting the exercise to be a relaxing day at the lake.
So my post was just intended to expand the range of possibilities for some people who might be suffering from recency bias; not to make them more "scared" of a crash, but to help give their psyches the ability to bend rather than break on the rare chance that the eels show up.
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But inflation would eat his returns whether he consciously realized it or not, and sky's scenario didn't have them panic bailing, but holding.
Not arguing for argument's sake, but sky's last bullet point says:
2024 - down 10%: "FFFFFFFUUUCKKK YOUUUUUUUUU!!!!! THIS BULLSHIT IS ALL FUCKING BULLSHIT!!!! I WAS SUPPOSED TO BE RETIRED 5 YEARS AGO!!! Ok, ok, despite all this bullshit and the world dicking me over, the five extra years I've spent slaving away at a job I hate may have let me accumulate enough wealth to declare myself FI by now, but that was under THE OLD RULES. The stock market clearly doesn't work anymore as a tool to build wealth, so there's no fucking way that "4% SWR" bullshit is going to hold going forward, which makes my planned 60-year (now 55-year) retirement a fucking childish pipe-dream. I'm selling all my stocks and putting it in gold. Peace out, assholes."
Obviously he was being facetious on the selling all my stocks and putting it in gold, but the point I was trying to make is that the whole time, in sky's scenario, the investor is looking at nominal returns, and not real returns (since you can't find real returns from a chart, normally, indexview is a rare exception), and nominally, he did pretty well in the period. Most people who are posting in this forum quote nominal and not real returns, and in current times that's probably appropriate because inflation is so low, just saying that there's more than a fair share of investors who don't take inflation into account when they should
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Oh, sure, I forgot about the last throwaway joke. My bad. It didn't actually affect the scenario at all though.
My point was he didn't bail after the first year, or two, crash, but held on the whole time, yet still had to work years and years more.
And it won't matter if he's looking at nominal returns, which I agree with you that he likely would be, because his expenses would have risen in the meantime and his "number" would have risen correspondingly (so that's why the real returns matters).
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Sorry to beat a dead horse, but my point is, you showed the REAL (adjusted for inflation) return of sp500 - the correct view because it counts spending power, whereas an average investor will look at his market returns without considering inflation (if we're talking about psychological impact).
That raises an interesting question. I agree that today, the "average investor" is likely to ignore inflation when feeling the psychological impact of his returns. But maybe that's just because inflation, even to the sophisticated investor, has been a relative non-issue in recent times. Its noise that can be waved away as a rounding error. But I wouldn't be surprised if "the average investor" of the 70s/80s was more psychologically- and emotionally-aware of the effects of inflation than even a sophisticated investor today, simply because inflation had a much more obvious and impactful effect on day-to-day life in that era. For example, you mention that IndexView is relatively rare in showing real returns, and I agree. But if Morningstar's website was created in 1972, it seems entirely plausible to me that the "Growth of 10k" charts would show (or at least have the option to show) real returns, and then so would everyone else's, maybe even your broker's website.
Unfortunately feelings of 1970s-era investors vs. 2010s-era investors is probably a hard thing to get data on, because anyone who was investing in that era and felt the effects of inflation in their emotions is likely to have continued carrying that inflated inflation-awareness throughout their entire lives.
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Was I the only one who read skyrefuge's entertaining scenario and thought that it looked really good? With a savings rate high enough to start from zero and expect FIRE in 10 years (i.e. ~67%), even that market performance wouldn't be enough to delay retirement that much. And during this whole time, the young mustachian is stacking away tons of cheap stocks. He may not know exactly when the market will start climbing again, but he would know that CAPE was about 50% of the historical average at that point, and that he was very likely to have a really rich retirement. He could also know that with CAPE only being below that point twice in history, his SWR is actually increased to much more than the usual 4%.
I'd actually be pretty happy about that kind of scenario happening now. I think being where we are now is a much more worrisome place to be for planning a FIRE in the next 5ish years.
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Was I the only one who read skyrefuge's entertaining scenario and thought that it looked really good?
I had just started preparing a post along similar lines. I completely agree with skyrefuge that it would be a good thing for everyone to be mindful that the next market crash could take the form of the drawn-out 1972-style downturn outlined in his blow-by-blow account (or an even worse historically unprecedented type of downturn) rather than a sharp drop and quick recovery, and we should all mentally steel ourselves accordingly. But it is true that for as long as someone chooses to remain in the accumulation phase, a down market is necessarily a good thing (ignoring the bad outcomes that have a correlational (but not necessarily causational) relationship with down markets, like employment layoffs).
Someone who is told that there might be some harrowing shit in their military training exercise is less-likely to snap when the electric-eel attack starts at 3am than someone who is just expecting the exercise to be a relaxing day at the lake.
See that, sol? I rest my case. This is skyrefuge's B material, and it's still wittier than anything anyone else in the forum can muster.
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Was I the only one who read skyrefuge's entertaining scenario and thought that it looked really good? With a savings rate high enough to start from zero and expect FIRE in 10 years (i.e. ~67%), even that market performance wouldn't be enough to delay retirement that much.
I went ahead and did the math, for a $100k earner with a 66% savings rate. At a steady 7% real return, that's a 10-year career to hit his $850k number. Assuming his first 5 years had that steady 7% return, and then the 6th year started the 1973 sequence, he'd have only $516k by his 10th year, and by the 15th year, the end of the sequence I described, he'd still be short at only $812k. His retirement is already delayed at least 50% past his expectation. Maybe a 5+ year delay is not "that much" to someone expecting a 40 year career, but for someone expecting a 10 year career, it's enormous.
And more importantly than the time delay, there is a strong risk that his faith is also damaged. Yes, with hindsight (and our recency bias), we know that he would have been fine if he had retired anyway in 1982, even if he was still short of his number (and he probably would have been fine retiring even earlier, since the stock market run after that point was ridiculous).
But this guy had been getting beaten up and abused for 9 years. Twice he had seen recovery finally approaching, only to be smacked down again for his impudent optimism. The environment was so bad and hopeless that Business Week actually published a cover story about The Death of Equities (http://www.bloomberg.com/bw/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice). If CAPE had been around, would anyone have paid it any heed? The CAPE value had been freakishly low for years, and it hadn't done shit except lead to more misery. You're seriously gonna tell me "don't worry, next year will be the year" and expect me to believe you?! If I was that much of a sucker, I'd be a fuckin' Cubs fan!
No one younger than 65 knows what it really feels like to live through a period like that as an investor (unless they live in Japan!), but it seems likely that they would be just as biased by their recent history as we are by ours, and that would result in two strongly divergent outlooks. It's hard to imagine the MMM blog would have even been born in that environment, much less catch on; it would all sound like a crazy pipe dream to us just like it does to those complainypants newspaper columnists that we all laugh at.
arebelspy was actually wrong; the final year of my hopeless non-retiree where he snapped was not just a throwaway joke. It was meant to illustrate how living through a particular environment can have major and long-lasting effects on your thought-process going forward. You hear the stories of those who grew up during the Great Depression who stayed unnecessarily frugal for the rest of their lives, for example. Heck, the original edition of the otherwise still-excellent Your Money or Your Life (http://www.mrmoneymustache.com/2012/12/18/your-money-or-your-life/) thought 30-year Treasury Bonds were the only investment you'd need. Sounded perfectly reasonable at that time, sounds crazy today. My point is that we are all at least partially products of our environment, and sometimes it's helpful to attempt to investigate how those environmental biases could be leading us astray.
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Plus savings rate > returns. :D
This. On a short enough timeline, like with the hypothetical investor discussed by skyrefuge, savings rate is king. That's one of the things I loved about Jacob at ERE - he basically assumed no return during accumulation. He said that you can spend your non-working time in the future to learn about investing and pick the right opportunities. Do I use that approach? No, but my accumulation phase is already almost twice as long as his and will probably end up being 3-4x longer.
That being said, skyrefuge, I completely agree that the scenario you mentioned can really affect someone's psyche. It also could delay FIRE a bit, but if the person mentioned is truly concerned with FI and hits a bad recession, I think she will buckle down and save more. I know tons of people who kept their good jobs in 08-09 but had far less superfluous spending due to the carnage around them and in their portfolios. I wouldn't be surprised if many people could up their savings rates by 5-10% in such a scenario, which would undo much of the damage of a really bad market.
I guess the exception would be if you have a really long accumulation phase, ie standard working career. If you're trying to get to 1MM and you're doing it over 30 years, well, a recession in year 35 is going to hurt since your savings rate was never the primary driver of your portfolio.
tl;dr Mustachians should be fine in such a scenario if (and it is a big if) they can keep their heads.
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[more brilliant stuff]
These are all excellent points and should be required reading for every aspiring early retiree. In addition, although your focus is on the psychological effects on aspiring early retirees still in the accumulation phase, we shouldn't overlook the psychological damage these types of markets can inflict on actual early retirees already in the drawdown phase. I have to assume that it's even more difficult for an actual retiree to watch the market's value plummet, or slowly erode over time, than it is for the accumulator, because the retiree's portfolio represents not the abstract promise of retirement in the future but the actual, current means of putting bread on the table. Even grizzled veterans like Nords have talked about how the 2008 crash tested the strength of their steel cojones, so what would have happened to the poor schmuck who early-retired in 1972? Skyrefuge can pen the tale more colorfully than I, but I think the punchline would be that that hapless retiree would abandon this early retirement idea as a crazy pipe dream even more quickly than the hopeful accumulator.
We should also all keep skyrefuge's sobering reminders about recency bias in mind when, for example, we confidently declare that we have the risk tolerance for a 100% (or near-100%) equity allocation. If that iron stomach was forged merely over the course of a raging bull market with a short dip or two, it may turn out to be made of jello when and if a prolonged crash arrives.
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Anyone who is seriously worried about a significant market reduction delaying FI or RE meaningfully early should be sure to include some real estate in their overall retirement plan.
Situations where the market is dropping and stagnating are considerably worse if you have a portion of your income coming from a rental. ARS has written elsewhere that rent rates drop considerably less than the market during crashes.
For most MMM folks, even limited and "lame" part time work if necessary (not to mention legitimate, career related work paying considerably more) combined with a rental will provide a buffer to allow for a much lower than 4% withdrawal rate or to sustain themselves through a period of prolonged market stagnation or declines.
A family spending $30k a year (pretty high by standards here) with $1k/month rental income and $500/month part-time income will only have to drawdown about $12k/year from their other investments. At 4% withdrawal, that's "only" $300k in available investments. This provides a ton of flexibility.
As an aside, scenarios like those being discussed are part of the reason I think man folks prefer paying mortgages off vs investments. It's not optimal, but, it does provide some "insurance" against a long period of non-ideal market performance for an early retiree. This becomes even more true if rental or other part-time work is part of your FIRE plan, as your cashflow required on a yearly basis is lower. This causes market performance to matter less, because a period of stagnation or drop will affect a smaller portion of your cashflow. Someone retiring early only on dividends or portfolio withdrawals is heavily tied to market performance.
For many people, too, all their investments have to do is get them to 60-70 when pensions or SS become enough to sustain their FIRE lifestyle. Most here will have enough in SS payments to cover nearly all expenses in traditional retirement years. And many have some level of pension from previous jobs, even if not a full pension.
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On skyrefuge's repeat of 1972 crash hypothetical -
Has the US government changed its approach to the marketplace since that era? With the 2008 crash, the government took a very active role in trying to stabilize the economy, and it bounced back fairly quickly, at least as far as the stock market is concerned.
Did we have a policy shift since the 1970s, in order to try to reduce the likelihood of repeating a 10-year period of bad economy (stagflation etc) ? In other words, is it foolish to expect future recessions to be shorter and recoveries quicker (like 2008), given that the government policy makers have presumably learned something from 1929, 1987, etc.
I don't know the answer. Just throwing it out for discussion.
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It's funny what we each see (with our own biases) as the more "important" part of the lesson.
Some of you (like sky, original writer of the scenario) see the person losing faith at the end after 9 years of misery in the markets, and that being the key problem.
I don't see that nearly as much of an issue (maybe because I feel like I wouldn't have that issues?) as the extra working time.
Plus savings rate > returns. :D
This. On a short enough timeline, like with the hypothetical investor discussed by skyrefuge, savings rate is king.
Uh, but it's not always. Definitely not in Sky's scenario.
I mean yeah, saving more is better than not, but the market just dominated him, and made working time to FI 15 years instead of 10. 50% longer working career? Brutal. If savings rate was "king," the market wouldn't have that big of an influence. Savings rate is still super important, don't get me wrong, but if it was king bad returns would add 10% or something, IMO.
That's one of the things I loved about Jacob at ERE - he basically assumed no return during accumulation.
What an optimist. What if you have negative real returns?
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arebelspy was actually wrong; the final year of my hopeless non-retiree where he snapped was not just a throwaway joke. It was meant to illustrate how living through a particular environment can have major and long-lasting effects on your thought-process going forward. You hear the stories of those who grew up during the Great Depression who stayed unnecessarily frugal for the rest of their lives, for example. Heck, the original edition of the otherwise still-excellent Your Money or Your Life (http://www.mrmoneymustache.com/2012/12/18/your-money-or-your-life/) thought 30-year Treasury Bonds were the only investment you'd need. Sounded perfectly reasonable at that time, sounds crazy today. My point is that we are all at least partially products of our environment, and sometimes it's helpful to attempt to investigate how those environmental biases could be leading us astray.
All the more reason why people shouldn't just blindly index, do at least the very basic test of comparing earnings yield (http://www.multpl.com/s-p-500-earnings-yield) to treasury yield (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). If an investor were to do that back in 1970, he would be holding treasury bonds instead of stocks - why hold stocks if Treasury yield is HIGHER than stock yield? Stocks come with added risk. Now this doesn't mean sell whenever the two converge (you need to think about tax consequences), but it does signal that you should put your additional capital contributions somewhere else for the moment - not stocks
I know these tables are not the most precise or accurate, but just take a look - http://www.multpl.com/interest-rate/table, 10 year treasury was 7.8% in 1970, http://www.multpl.com/s-p-500-earnings-yield/table/by-year, SP earnings yield was 6.34%. You can find a similar story right before each crash and right before each recovery (2001, for example, before the crash, and 2011/2012, for example, before the 30%+ gains)
I just think investors should look at opportunity cost of capital allocation, we already make these decisions (do I buy domestic or international? how much of my portfolio do I dedicate to bonds?) - but somehow we are stuck with the idea that stocks are a golden ticket, and from time to time it's not. Fundamentals do matter, even if the most zealous of stock fanatics deny it. And you need to look at total return rather than just capital gain (or prices on a chart)
@Clean Shaven - Fed targets inflation much more highly now, so the 1970s isn't likely to happen again, I had a post earlier in the thread showing nominal returns in the 13 year period 1972-1985 was +140%, so not terrible, but because of inflation, you end up with Sky's scenario - a very REAL loss of purchasing power, as arebelspy said (expenses go up)
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Let's all predict the market's (S&P 500) next 10%+ dip...
I expect it won't look too bad to me, due to not holding 100% VTI. Instead, I own 25% US, 25% Canadian, 17% EAFE, 3% emerging and 30% fixed income.
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(random guess)
It will happen around September 15th following a long overdue interest rate increase. The market will panic and I will sell my car and throw the money into that MF Abyss. When the panic of "We can't buy bonds because rates are increasing, we can buy dividend stocks because everyone will leave to buy bonds, we can't buy growth stocks because they loose value in increasing interest rates" --- yeah, when that bullshit is over, my shit will be gold as I rocket into the stratosphere.
That is my prediction and Im sticking to it.
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What a great read! Thanks so much for this thread - really good stuff.
I think I'm overly cautious anyways, and that's okay. Our plan is to have 4 rentals (probably paid in cash...we'll see where the interest rates are at that point) plus sock away a decent sum into the market, plus work part-time for about ten years after our full-time working careers. We'll semi-retire somewhere around 46, but won't really fully retire until 55, if we decide to fully retire then. We'll also have a small teacher's pension, an employer contribution pension plan, and social security at some point. But I'm extremely risk averse, I might loosen this plan up depending on what happens but it seems like during the above scenario we probably would have been fine to keep our plan of semi-retiring at 46 - both of us cutting down work hours and just bringing in enough to cover our low expenses and waiting out that period of time.
It was really good for me to read the 1970's stagflation hypothetical returns (and the emotional, but understandable reaction it it).
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Plus savings rate > returns. :D
This. On a short enough timeline, like with the hypothetical investor discussed by skyrefuge, savings rate is king.
Uh, but it's not always. Definitely not in Sky's scenario.
I mean yeah, saving more is better than not, but the market just dominated him, and made working time to FI 15 years instead of 10. 50% longer working career? Brutal. If savings rate was "king," the market wouldn't have that big of an influence. Savings rate is still super important, don't get me wrong, but if it was king bad returns would add 10% or something, IMO.
That's one of the things I loved about Jacob at ERE - he basically assumed no return during accumulation.
What an optimist. What if you have negative real returns?
I think we are actually on the same page here...we're just sniping at the margins.
Let's use the Jacob/ERE accumulation phase idea. 80% savings rate, getting you to 6.25 years in accumulation. Let's use 100k net income just to keep things clean.
Year 1: $80k invested, 24% drop in the market = $60.8k
And this is assuming all of the 100k hit this 30%, which is probably not a good assumption
Year 2: $80k invested, 34% down = $120k
Again, these are very simple calculations on a year-by-year basis with lump sum inputs
Year 3: $80k invested, 30% up = $236k
Year 4: $80k invested, flat = $316k
Year 5: $80k invested, 11% down = $361k
Year 6: $80k invested, 3% up = $452k
If this investor had achieved 0% returns during this timeframe, her portfolio would now be $400k. A significant difference to be sure, but only around 6 months at this savings rate. The 1972 super-saver still only works 6 months longer (I made it a whole year in the numbers above because I bet 1972 investor would have OM1/2Y syndrome). If we're playing using percentages here, the working career is 10% longer.
So, I think we're saying the same thing...right? Of course the psychology would be terrible and the risks would still be great, because the downslope sequence sucks (up 1% in Year 7, up 13% in Year 8, down 10% in Year 9). But even that terrible downslope isn't THAT bad. Let's see how it goes:
Year 7: $452k portfolio, $20k withdrawal, market up 1% = $436k
Year 8: $436k portfolio, $21k withdrawal due to high inflation only partially offset by cutbacks, market up 11% = $472k
Year 9: $472k portfolio, $23k withdrawal due to continued high inflation and no further cutbacks possible, market down 10% = $448k
Again, my calculations are very rudimentary as they assume 100% S&P 500, lump sums and other nonsense coming from my puny brain. Actual results could be a bit different. However, at the end of this exercise you start to see the wisdom of two ideas: stocks for the long run and savings rates being the crucial ingredient for FIRE seekers. The fun note at the end of this potential scenario is this investor would soon see the greatest bull market in American history. The portfolio would literally explode with wealth, turning our awesome 1972-er into a multimillionaire and philanthropist.
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Was I the only one who read skyrefuge's entertaining scenario and thought that it looked really good? With a savings rate high enough to start from zero and expect FIRE in 10 years (i.e. ~67%), even that market performance wouldn't be enough to delay retirement that much.
I went ahead and did the math, for a $100k earner with a 66% savings rate. At a steady 7% real return, that's a 10-year career to hit his $850k number. Assuming his first 5 years had that steady 7% return, and then the 6th year started the 1973 sequence, he'd have only $516k by his 10th year, and by the 15th year, the end of the sequence I described, he'd still be short at only $812k. His retirement is already delayed at least 50% past his expectation. Maybe a 5+ year delay is not "that much" to someone expecting a 40 year career, but for someone expecting a 10 year career, it's enormous.
Good points. But I guess I see it the other way. Instead of a getting to retire 30 years before everyone else, this mustachian gets to retire 25 years before everyone else. And then gets insanely rich in the 80's and 90's. And his 5 year delay would only be if he were 100% S&P 500. Any international exposure or bonds or small caps or REITs would have helped him out. You have to be diversified. There were a couple years there where small caps went up over 50% per year.
Yes, the mustachian in the 70's didn't know about CAPE, but we all do now. The 5 year delay wouldn't even need to be a delay.
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This won't change my overall opinion re: stocks for the long run, diversification, etc, but I do have a question since I'm having a hard time finding a good source:
What if we all were Japanese and we started this experiment at the market peak in Tokyo? Perhaps our investor already had a couple hundred thousand stashed and continued to plow money into the two and a half decades of misery...what would that look like?
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It's not a question worth giving an actual answer to, but I think it's a good philosophical question for people to think about for themselves.
Because I've been feeling lately that a lot of people have a subconscious recency bias telling them "a market crash is a deep dive quickly followed by a long and steady bounce back up", just because that's what the last two major market crashes have looked like. The more you believe that, the less likely it will be that the next crash resembles the previous two, because the universe likes to fuck with you like that. Our species has an incredible pattern-recognition processor built-in, but using it on input that had no part in its evolution can lead to some incredibly wrong answers.
I may be reading invisible subtext, but I hear that bias when people talk about hoping for another crash so they can "buy stocks on sale". In general, people just seem to have more confidence in post-crash bounce-backs than they ought to, like a crash is just some "irrational" thing that the market will quickly and inevitably correct.
In 1972, the inflation-adjusted, dividend-reinvested S&P 500 lost ~50% of its value in a 2-year slide, almost identical to the crashes in 2000 and 2007. But the similarities end there, because that time, the post-crash bounce-back stalled after a year. In 1982, seven-and-a-half years after the 1974 bottom, your investment was still down 37% from its 1972 value. You wouldn't have returned to your break-even point until 1985, after a full twelve years in the hole. That's a longer period of time than an entire Mustachian career, so all of your "buying low" wouldn't have done anything to help you retire earlier. Contrast that with the recovery from the 2007 crash, which took only five-and-a-half years.
So I have no idea what the next crash will look like, but I wouldn't bet much money on it looking like the last two.
(http://i.imgur.com/dHjbYAH.jpg)
And look, I didn't even have to invoke Japan!
A tough time to be in the market, but if someone is looking for "cheap stocks" then they're probably still in their accumulation phase. And the 1973 time frame was not a bad time at all to be in the accumulation phase. From 1974 to 1985 you were getting an average of 10% returns per year, that's phenomenal. The people that it would have hurt were those already retired in 1973 - THAT would have been some pain!
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You may have heard about the infamous August, 1979 Business Week cover story called, "The Death of Equities." You may want to actually read it if you haven't already. Put yourself into the mindset of those who had just gone through the 70's bear market, stagflation, the Iran hostage crisis, and the feeling of the twilight of America (which Jimmy Carter actually articulated in a speech around that time.)
http://www.bloomberg.com/bw/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice
The irony is that the article mocks the elderly, when in hindsight they knew something the public didn't. They were staying the course.
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You may have heard about the infamous August, 1979 Business Week cover story called, "The Death of Equities."
Magrien3 was recently pardoned for his similar transgression (http://forum.mrmoneymustache.com/investor-alley/does-google-owns-the-future-who-else-does/msg631353/#msg631353), but for your violation of the cardinal rule against failing to read the thread and linking to an article that's already been posted within a 15-post radius in the very same thread, the punishment shall be swift and severe: I hereby place you under forum citizen's arrest and henceforth banish you from the forums make you feel slightly embarrassed, but then realize that we're all human, and we have a laugh about it over a beer!
MOD EDIT: More appropriate punishment.
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This won't change my overall opinion re: stocks for the long run, diversification, etc, but I do have a question since I'm having a hard time finding a good source:
What if we all were Japanese and we started this experiment at the market peak in Tokyo? Perhaps our investor already had a couple hundred thousand stashed and continued to plow money into the two and a half decades of misery...what would that look like?
Anyone willing to do this? My math and internet connection suck.
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These are all excellent points and should be required reading for every aspiring early retiree. In addition, although your focus is on the psychological effects on aspiring early retirees still in the accumulation phase, we shouldn't overlook the psychological damage these types of markets can inflict on actual early retirees already in the drawdown phase. I have to assume that it's even more difficult for an actual retiree to watch the market's value plummet, or slowly erode over time, than it is for the accumulator, because the retiree's portfolio represents not the abstract promise of retirement in the future but the actual, current means of putting bread on the table.
Yeah, my original thought process was this: the retiree has already locked in his course and chosen his fate, so for better or worse, the act of living through unexpected market performance would have little ability to change his future behavior or relationship with investing. Yes, he'd even more stress than the accumulator, but his investing beliefs would remain intact due to a certain sort of fatalism imparted by a lack of choice. Whereas the accumulator has more "freedom" to abandon his strategy, become psychologically scarred, and never return to it. But now I realize that of course the retiree can abandon his strategy too, by returning to work, or using the remains of his stash to buy a bunker in Nevada, etc.
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Did we have a policy shift since the 1970s, in order to try to reduce the likelihood of repeating a 10-year period of bad economy (stagflation etc) ? In other words, is it foolish to expect future recessions to be shorter and recoveries quicker (like 2008), given that the government policy makers have presumably learned something from 1929, 1987, etc.
Sure, government policy has likely helped prevent the same thing from happening, but it's almost surely done nothing to prevent the next bad thing that no one has seen before and no one expects. Worse, efforts to prevent "the same thing" from repeating could actually be (and often are) the cause of the "the next bad thing". If market risks were so avoidable and predictable, the market would not provide the rewards that it does.
So I'm not saying "don't expect the next crash to look like 2008, because it's going to look like 1973".
I'm saying: "don't expect the next crash to look like 2008, because there's no good reason to expect that. It might look like 2008, it might look like 1973, it might look like 1929, but it's more likely that it won't look like any of those. If you have a strong opinion of what it will look like, that probably means you have an insufficient respect for the risks inherent in the market".
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All the more reason why people shouldn't just blindly index, do at least the very basic test of comparing earnings yield (http://www.multpl.com/s-p-500-earnings-yield) to treasury yield (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). If an investor were to do that back in 1970, he would be holding treasury bonds instead of stocks - why hold stocks if Treasury yield is HIGHER than stock yield? Stocks come with added risk. Now this doesn't mean sell whenever the two converge (you need to think about tax consequences), but it does signal that you should put your additional capital contributions somewhere else for the moment - not stocks
Huh? This looks like a pretty crappy strategy to me (as I would expect of any market-timing strategy with such a simple ruleset). You buy 10-year treasuries instead of stocks in 1970, so you can't take advantage of the 2.5 year stock run-up before the 1973 crash? Then, 10-year treasury yield beat earnings yield every single goddamn year from 1981 through 2003; someone who avoided stocks and kept buying treasuries through that period based off your advice would have wanted to kill you. So if you still think that metric is a good crash-indicator, I've got an awesome stopped clock I'd like to sell you!
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Yes, the mustachian in the 70's didn't know about CAPE, but we all do now. The 5 year delay wouldn't even need to be a delay.
Again, it's not a question of whether that 70s Mustachian knew about CAPE. It's whether he trusted it to hold any meaning. Even, if, like you, he was fully convinced in 1970 that CAPE was some immutable part of the fabric of the universe, by 1982, he had changed his mind. Just as Issac Newton would have changed his mind about his supposed law of gravity if he had subsequently seen a feather falling faster than a bowling ball hundreds of times and year after year.
There is stuff that we think we "know" that future will tell us we were wrong about. In some cases it will be because our current understanding is revealed to be incorrect/incomplete. In other cases, it will be because our understanding was actually correct, but reality diverged from our model for a period longer than we expected it to. Only in the latter case would that 70s Mustachian be "correct" in relying on CAPE to retire on a lower-than-expected stash. In the former case, where CAPE was discovered to just be a bad metric, he'd be a fool to rely on it. After seeing low-CAPEs for years with no positive results, two gas crises, and inflation getting worse and not better, I think it would be quite rare even for an optimistic-Mustachian to say "oh, yeah, I feel totally comfortable retiring with a 6.6% WR, because that CAPE is low!"
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Huh? This looks like a pretty crappy strategy to me (as I would expect of any market-timing strategy with such a simple ruleset). You buy 10-year treasuries instead of stocks in 1970, so you can't take advantage of the 2.5 year stock run-up before the 1973 crash? Then, 10-year treasury yield beat earnings yield every single goddamn year from 1981 through 2003; someone who avoided stocks and kept buying treasuries through that period based off your advice would have wanted to kill you. So if you still think that metric is a good crash-indicator, I've got an awesome stopped clock I'd like to sell you!
Hmm, you're definitely right about that, 712% from 1981 to 2003 for SP500 (no dividend reinvestment), 1475% with dividend reinvestment, whereas with 10 year treasury, if you swapped everytime you could get a higher interest rate (in 1982, and 1995) or whenever your 10 year duration ran out (in 1992), you would end up with 1057% - that's equivalent to 400K worse if your initial investment was 100K. And this is assuming only an initial investment, not DCA, where SP500 would blow treasuries out of the water
10 Year Hold 1,000.00
1981 12.57% 12.57% 1,125.70
1982 14.59% 14.59% 1,289.94
1983 10.46% 14.59% 1,478.14
1984 11.67% 14.59% 1,693.80
1985 11.38% 14.59% 1,940.93
1986 9.19% 14.59% 2,224.11
1987 7.08% 14.59% 2,548.61
1988 8.67% 14.59% 2,920.45
1989 9.09% 14.59% 3,346.54
1990 8.21% 14.59% 3,834.80
1991 8.09% 14.59% 4,394.30
1992 7.03% 7.03% 4,703.22
1993 6.60% 7.03% 5,033.86
1994 5.75% 7.03% 5,387.74
1995 7.78% 7.78% 5,806.90
1996 5.65% 7.78% 6,258.68
1997 6.58% 7.78% 6,745.61
1998 5.54% 7.78% 7,270.41
1999 4.72% 7.78% 7,836.05
2000 6.66% 7.78% 8,445.70
2001 5.16% 7.78% 9,102.77
2002 5.04% 7.78% 9,810.97
2003 4.05% 7.78% 10,574.26
I am curious tho, if you could have gotten a 30 year treasury bond (from my quick and dirty research I did not see a 30 year offered back then) yielding 14.59% in 1982, would you have taken it?
Edit: That is actually really sloppy math, I'm assuming I can reinvest the principal at the original rate - total return is probably closer to 700% instead of 1057% - also forgot to include a growth assumption in the SP500 where there is none for treasury bonds when comparing the earnings yield for each - embarrassing!
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On the original question what will the next 10% correction look like, I think it will be extremely short, with the market recovering in less than 6 months and then reaching new highs.
There is still a lot of money on the sidelines from the last crash, waiting to come into the market. They will come in on a 10% pullback even though they missed the previous 90% gains from the low.
The other reason it will be short is simply the state pension funds require market gains to remain above water without significant tax increases or cuts to pensions. The path of least resistance is to manipulate the market higher such that these gains are realized.
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Some interesting observations on this issue from the Reserve Bank of Australia, if you want a more economics-y view.
http://www.rba.gov.au/speeches/2015/sp-gov-2015-04-21.html
My take-homes for this were:
- There has been a reduction in the levels of liquidity. This means markets are going to move faster, I suspect both on the way down and the way up.
- The divergence between financial and real world risk taking, along with already high levels of leverage make monetary policy fairly weak - so central banks won't be able to do much to help. I guess the other way to look at this is that rates are already super low, and the money supply has been significantly expanded already through QE in many countries. The other observation from this is that the equity premium is unusually high at the moment, comparing earnings yields against the "risk free"rates, being 5%-6%
- There is limited political will (and capability?) for fiscal policy.
- There is a large amount of money invested across borders chasing a yield arbitrage. Panic repatriation of this in a fairly il-liquid market will have some significant exchange rate issues.
- Central banks are trying to be maintain easy monetary policy for the long haul (with a few exceptions such as NZ (raising rates) and the US (telegraphing raising rates in the future)).
So, how is this actionable? I don't know. What I do know is that:
- These observations seem to indicate that markets may move savagely when they do. Probably not a good time to be highly leveraged. I'm going to work down my margin and callable debt.
- Anything going into cash/ "risk free" assets is losing 5-6% per year compared to the earnings yield. Central banks are trying to maintain stability for a period of years. I'm not prepared to risk 6% annually in the potential of a crash.
- My aim: Reduce gearing to a neutral level. When markets are evidently on sale next, consider re-introducing some conservative gearing.
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You may have heard about the infamous August, 1979 Business Week cover story called, "The Death of Equities."
Magrien3 was recently pardoned for his similar transgression (http://forum.mrmoneymustache.com/investor-alley/does-google-owns-the-future-who-else-does/msg631353/#msg631353), but for your violation of the cardinal rule against failing to read the thread and linking to an article that's already been posted within a 15-post radius in the very same thread, the punishment shall be swift and severe: I hereby place you under forum citizen's arrest and henceforth banish you from the forums make you feel slightly embarrassed, but then realize that we're all human, and we have a laugh about it over a beer!
MOD EDIT: More appropriate punishment.
My apologies. I missed that previous link and comment my first time through the thread. Sorry, it came from speed-reading the forum at the office.
As penance, and to continue moving the thread, may I instead suggest reading "The Great Depression - A Diary" by Benjamin Roth. It literally provides the mindset of an investor (well, someone keenly interested in investing, but has no money to invest) throughout the Great Depression. It continues over the decade. At one point he even stops the diary in 1935 because he intended to journal from the beginning of the depression to its end, and it ended. And then he picks up because he realized that it didn't.
Ben Roth doesn't give up on the markets in the end. He develops an investment philosophy that sounds like the Bogleheads. But during most of the Depression he's watching other people lose and make fortunes (and lose them again) while he's forced to stay on the sidelines due to lack of cash. His big lesson -- cash is king. Multiple times he stated that if he had lived below his means to accumulate some savings prior to the Depression, he could have been set for life. Once the economy tanked, professionals like lawyers and doctors were living hand-to-mouth.
If there are severe economic dislocations, you don't want to have any margin, and you don't want to own real estate (if rents fail to come in, you still have to maintain the property, pay taxes, and pay a mortgage. You have no flexibility in expenses short of razing your building to reduce the tax obligation and maintenance costs.) His conclusion was that diversified blue chip stocks, government bonds, cash on hand for buying opportunities, and a very long time perspective were the best choices to survive financially.
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My apologies. I missed that previous link and comment my first time through the thread. Sorry, it came from speed-reading the forum at the office.
I accept your penance, but next time (lenient-moderator-intervention notwithstanding) it's the guillotine!!!
His conclusion was that diversified blue chip stocks, government bonds, cash on hand for buying opportunities, and a very long time perspective were the best choices to survive financially.
To skyrefuge's point, for every monkey-wrench-avoidance lesson history teaches us, the future will find a new kind of monkey-wrench.
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Hmm, you're definitely right about that, 712% from 1981 to 2003 for SP500 (no dividend reinvestment), 1475% with dividend reinvestment, whereas with 10 year treasury, if you swapped everytime you could get a higher interest rate (in 1982, and 1995) or whenever your 10 year duration ran out (in 1992), you would end up with 1057% - that's equivalent to 400K worse if your initial investment was 100K. And this is assuming only an initial investment, not DCA, where SP500 would blow treasuries out of the water
I think just looking at this Morningstar Growth of $10k chart (http://quotes.morningstar.com/chart/fund/chart.action?t=XNAS:VFIAX®ion=usa&culture=en-US&cur=&dataParams=%7B%22zoomKey%22%3A11%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00L8W%7C%24FOCA%24GI%24%24%7C%24FOCA%24GL%24%24%22%2C%22type%22%3A%22FO%7CCA%5DFO%7CCA%5DFO%22%2C%22name%22%3A%22XNAS%3AVFIAX%7C%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20Intermediate%20Government%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%7C%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20Long%20Government%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%20%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2201%2F01%2F1981%22%2C%22endDay%22%3A%2201%2F01%2F2004%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D) is the easy way to do the math. The S&P 500 investment grew ~1400%, while the intermediate government bond benchmark (I don't know of an actual fund that covers that period) grew ~500%.
I am curious tho, if you could have gotten a 30 year treasury bond (from my quick and dirty research I did not see a 30 year offered back then) yielding 14.59% in 1982, would you have taken it?
Normally I would say "I have no idea", since I recognize that I would always be a product of my environment, and without living in that 1970s/1980s environment (as an investor), I cannot know how it would have shaped my decisions. But in this case, I think I can say "yes, assuming I could not see the future, I probably would have taken a 14.59% 30-year treasury", simply because that's what the 'Your Money or Your Life' author did (or at least recommended), and if it seemed like a good idea to him at the time, it probably would have seemed like a good idea to me too.
Of course, time then revealed that, while not a terrible choice, that wasn't the optimal choice. Just as time is likely to reveal that my current choice of a stock-heavy index fund portfolio is unlikely to be the optimal choice.
(FYI, the 30-year treasury was 14.22% in January 1982 (http://www.federalreserve.gov/releases/h15/data.htm), so close enough to the 14.59% of the 10-year.)
To skyrefuge's point, for every monkey-wrench-avoidance lesson history teaches us, the future will find a new kind of monkey-wrench.
Said much more pithily than my version!
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This thread made me think of a book I heard about recently:
http://en.wikipedia.org/wiki/The_Wisdom_of_Crowds
In this case, the crowd not only knows what the correction will look like, but will actually decide when and how much!
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Great thread. Important lessons.
Yeah, although in this case, I think I'm trying to highlight the need for "expectational flexibility" in addition to the "operational flexibility" that we normally talk about around here. Because operationally, my hypothetical accumulator didn't do anything wrong, until he finally snapped. And the reason he snapped is because he had failed to mentally prepare for the reality he experienced; it had not been included within the range of his expectations. He had read all the MMM cheerleading, never dug much deeper than a glance at an S&P500 price chart from 1995-2015, and wholly bought into the idea that a crash is inevitably a good thing for a Mustachian accumulator in his position.
If he had instead read my post illustrating the 1972 crash, his expectations for the outcome of a crash would have covered a broader range, and that might have given him the "expectational flexibility" to better tolerate the unpleasant outcome. Someone who is told that there might be some harrowing shit in their military training exercise is less-likely to snap when the electric-eel attack starts at 3am than someone who is just expecting the exercise to be a relaxing day at the lake.
So my post was just intended to expand the range of possibilities for some people who might be suffering from recency bias; not to make them more "scared" of a crash, but to help give their psyches the ability to bend rather than break on the rare chance that the eels show up.
This was a really striking thought for me, as a noob, and I thank you. But I still really hope I don't end up working an extra 5 years!!
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Back to the initial question...I hope it is soon. I gave the government a nice fat interest free loan last year and they are hopefully about to pay me back the principle. I need to invest it, but things seem a bit high at the moment for a big buy.
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So...we keep talking about the US in the 70s. Again, does anyone want to consider Japan or another country during a really bad period of returns?
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So...we keep talking about the US in the 70s. Again, does anyone want to consider Japan or another country during a really bad period of returns?
Where the US is now, is very different than where Japan was then. A lot would have to happen before the US could get to a place where the Japan-style lost decades would occur due to similar causes. The US could experience flat return for a long time, but different factors would have to drive that.
But it's an important risk for people to think about, and why I think it's unwise to be 100% US.
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For those who still think accumulation during the 70s sounds nice, don't assume constant real savings. Likely your salary won't keep up with inflation (assuming you keep your job):
(http://upload.wikimedia.org/wikipedia/commons/b/b1/US_Real_Wages_1964-2004.gif)
About once a week I actually have something to say, but most of my time on the forum is just mindless drivel.
Oh, hello there. Fancy meeting you here.
I sympathize with the posts that periodically pop up questioning whether the commitment some of us have to this forum starts to border on unhealthy addiction
(http://24.media.tumblr.com/tumblr_m0ruwj7ydz1qe1pmho1_500.gif)
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So...we keep talking about the US in the 70s. Again, does anyone want to consider Japan or another country during a really bad period of returns?
This is the third time you've asked that, along with these two:
This won't change my overall opinion re: stocks for the long run, diversification, etc, but I do have a question since I'm having a hard time finding a good source:
What if we all were Japanese and we started this experiment at the market peak in Tokyo? Perhaps our investor already had a couple hundred thousand stashed and continued to plow money into the two and a half decades of misery...what would that look like?
Anyone willing to do this? My math and internet connection suck.
Given that, it seems like the answer to the above bolded question is "no."
Just didn't want you to keep feeling ignored. :)
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Remarkable thread. I thought it was going to be all puff and fun stuff, yet so many well formed thoughts and questions came pouring out.
Now, what to do about the impending correction? So far I have gleaned this:
-Every recession is different. 2008 and subsequent bounce back is anomalous.
-Optimism in the market during the mid-'70s was WORTHLESS. It can happen again.
For now, none of my plans have changed, even given so much to chew on in here. I plan on becoming an electrician, pouring my money into my Roth and 401k, and buying a house. I feel nothing can grant freedom like a pile of cash/investments, paid off home, no debt, and the ability to generate cash at will/need. We'll see if 1974 happens again tomorrow or 15 or so years from now...
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Given that, it seems like the answer to the above bolded question is "no."
Just didn't want you to keep feeling ignored. :)
It appears so. Thank you for not ignoring me. I don't quite understand how the question isn't interesting or relevant to the discussion, so I guess I don't belong here.
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My guess is people would be willing to discuss if you did the work and posted conclusions, but don't find it compelling/interesting enough to do the work themselves.
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My guess is people would be willing to discuss if you did the work and posted conclusions, but don't find it compelling/interesting enough to do the work themselves.
Yeah - NICE, I'm definitely interested and have been patiently waiting for someone else to take up the challenge of answering your question, but I'm too lazy to attempt to do it myself, primarily because we already know the answer, in broad strokes:
Question:
What if we all were Japanese and we started this experiment at the market peak in Tokyo? Perhaps our investor already had a couple hundred thousand stashed and continued to plow money into the two and a half decades of misery...what would that look like?
Answer:
As bad as, or worse than, skyrefuge's tale of woe upthread.
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My guess is people would be willing to discuss if you did the work and posted conclusions, but don't find it compelling/interesting enough to do the work themselves.
Yeah - NICE, I'm definitely interested and have been patiently waiting for someone else to take up the challenge of answering your question, but I'm too lazy to attempt to do it myself, primarily because we already know the answer, in broad strokes:
Question:
What if we all were Japanese and we started this experiment at the market peak in Tokyo? Perhaps our investor already had a couple hundred thousand stashed and continued to plow money into the two and a half decades of misery...what would that look like?
Answer:
As bad as, or worse than, skyrefuge's tale of woe upthread.
Hmm, I might have a go at it, with the understanding that it should be read for entertainment purposes only and any resemblance to real returns would be almost entirely coincidental.
My first quick read at the lower posts of this thread provoked my irritated "you can't compare to Japan, that's apples to sweet potatoes" kneejerk, but going back and reading the rest, I think I have a better idea what you were getting at. The thoughts about how an investor's feelings and reactions would be affected after such a long stretch of bad returns sounds very plausible. Very interesting thread so far.
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All the more reason why people shouldn't just blindly index, do at least the very basic test of comparing earnings yield (http://www.multpl.com/s-p-500-earnings-yield) to treasury yield (http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield). If an investor were to do that back in 1970, he would be holding treasury bonds instead of stocks - why hold stocks if Treasury yield is HIGHER than stock yield? Stocks come with added risk. Now this doesn't mean sell whenever the two converge (you need to think about tax consequences), but it does signal that you should put your additional capital contributions somewhere else for the moment - not stocks
Huh? This looks like a pretty crappy strategy to me (as I would expect of any market-timing strategy with such a simple ruleset). You buy 10-year treasuries instead of stocks in 1970, so you can't take advantage of the 2.5 year stock run-up before the 1973 crash? Then, 10-year treasury yield beat earnings yield every single goddamn year from 1981 through 2003; someone who avoided stocks and kept buying treasuries through that period based off your advice would have wanted to kill you. So if you still think that metric is a good crash-indicator, I've got an awesome stopped clock I'd like to sell you!
I've got a solution to this argument: Let's buy both stocks and bonds! (and some other stuff). It's called asset allocation (http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/ (http://www.mrmoneymustache.com/2012/02/17/book-review-the-intelligent-asset-allocator/)), and is the answer to most of the hand wringing on this thread about 1973. Applying a "Coffee House Portfolio" AA strategy, here are your yearly returns during this time period with yearly rebalancing:
1972 11.6%
1973 -9.4%
1974 -10.7%
1975 28.8%
1976 27.4%
1977 9.6%
1978 10.7%
1979 18.1%
1980 19.2%
1981 6.0%
1982 21.4%
1983 20.4%
1984 9.6%
1985 27.1%
1986 18.9%
It turned a 17 year slump into a 3.5-year slump. If you retired on 1 Jan 1973 with $1MM and a modified 5% withdrawal rule, by 1985 you'd have $2.6MM. Play around with the backtesting speadsheet on Bogleheads for more info: http://www.bogleheads.org/wiki/Simba%27s_backtesting_spreadsheet (http://www.bogleheads.org/wiki/Simba%27s_backtesting_spreadsheet)
Of course there's no guarantee that the next drop will work out so well for a good asset allocation strategy, but it's much better than worrying about the return of the S&P (or the Nikkei for that matter) in isolation.
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Our story begins as we approach the end of the 1980s. Japan's wonder economy has stunned the world. American firms study Japanese management practices, hoping to duplicate their successes, lest they be overrun by Japanese firms producing higher-quality products increasingly respected as first class brands, even superior to American stalwarts. Business leaders and economists grumble about how Japan's governmental ministry of trade and industry allows them to align government and business interests and development, while American firms thrash about without a guiding hand and clear national goals.
Our protagonist, Hiroyuki Yamashita, finds himself making a pretty good salary at one of the bigger Japanese banks. His position is a relatively boring one supporting consumer products and accounts. The guys making crazy money are the ones over in equities and business lending. He hears stories, but those departments are handled in the main office over near Ginza. Still, the company is doing well... very well. Company bonuses have been hefty for the past several years, adding the equivalent of several months' salary to his yearly pay. Hiro and his wife Yoshimi are frugal, even by traditional Japanese standards, and these bonuses have been stashed away in an investment account, growing as shares of mutual funds tracking the Nikkei 225 index. Hiro checks his balance amazedly in January of 1989 - the Nikkei has hit 30,000 points, up almost 9000 points since last year. Hiro has about 30 million yen invested, or about $240,000 US at the current exchange rate of 125yen/$. Hiro keeps an eye on the exchange rate because of his crazy dream - saving up a ton of money and retiring to Hawaii. He's only 30, so that's a long ways off still, but if the Nikkei keeps up this rocket ride to the stratosphere, who knows? Japan may have bought Hawaii outright by then.
Hiro doesn't think the Nikkei can keep up these crazy gains, though. Stock prices seem too high to him. He quietly hopes for a pullback so he can buy more shares at lower prices, as he's read about in the books on market investing he reads to practice his English. He knows Japan is still producing the best cars, electronics, and high tech products on the market, so when the market recovers he'll make an even bigger profit. Giddy coworkers have tried to convince him, using candlestick charts and other advanced analysis, that there's a lot of growth still to come, but he hopes to get some purchases in at fire sale prices to really benefit. Hiro decides to stick with his plan and invest about half of his 8 million yen (about $56,000) salary yearly, plus his bonuses, in his Nikkei funds. His crazy dream doesn't really consider retiring early... but if he and his wife get REALLY rich, who knows?
- Jan 1990: Nikkei is at 37,000, down slightly from its peak at around 39,000. Is this the start of the pullback? Not sure yet. Still up 23% for the year. Retirement account at almost 44 million yen ($306,000 at 144yen/$).
- Jan 1991: Nikkei is at 23,200 (down 38%). Hiro has felt like it was in freefall for the last year. Japan is now the one who has been stunned, as their giddy dreams and free-flowing champage has disappeared with a loud POP! of the bubble that no one wanted to acknowledge while the party was still going. Hiro is thankful his banking job is one of the more boring ones - some of his high-flying friends from the Ginza office have disappeared amid rumors and whispers of debts unpaid. Yakuza-looking gangsters loitering around their homes and offices have put many on edge. Hiro tells himself that he's buying stocks cheaply and will be in great shape as the economy recovers. His bonus has dropped to about one month's salary. He doesn't know yet that it will barely budge from this value for the next two decades. Retirement account is about 31.5 million yen ($233,000 at 135yen/$)
- Jan 1992: Nikkei is at 23,000 (about even). Hiro thought he saw the beginnings of a recovery in March when it got back up to 26,000, but it dropped back and struggled the rest of the year. Companies and banks struggled as they found that much of their assets were based on real estate values for their properties that were massively inflated from the bubble economy. Some companies have failed, and many banks juggle loans they have made to firms who now have no way to repay. Retirement account is about 36 million yen ($288,000 at 125yen/$).
- Jan 1993: Nikkei is at 17,000 (down 26%). Recovery? Where's the damn recovery?! Hiro is starting to worry. Japanese companies are still struggling. Some have failed. Some are even talking about restructuring, even layoffs. The thought sends a chill down his spine. Hiro has, like most Japanese, thought of his employment as a lifelong contract. Japanese companies have essentially never laid off employees. If they're forced to start now, what other unthinkable changes may be coming up? Retirement account is about 29 million yen ($232,000 at 125yen/$).
- Jan 1994: Nikkei is at 17,500 (up a trifle). Still no sign of a recovery. Firms in trouble have juggled to avoid layoffs, but "restructuring" and layoffs have started. Hiro's job is thankfully fairly safe, but other banks have not been in good shape with many uncollectable loans on their books. Retirement account is about 33 million yen ($295,000 at 112yen/$).
- Jan 1995: Nikkei is at 19,000 (up 8.5%). It doesn't feel like a recovery, with the Nikkei at only half its peak value. Hiro begins to feel like this is just how it's going to be. Retirement account is about 40 million yen ($392,000 at 102yen/$).
- Jan 1996: Nikkei is at 20,000 (up 5%). Retirement account is about 47 million yen ($447,000 at 105yen/$).
- Jan 1997: Nikkei is at 19,000 (down 5%). Retirement account is about 51 million yen ($428,000 at 119yen/$).
- Jan 1998: Nikkei is at 15,500 (down 18%). Retirement account is about 52.5 million yen ($404,000 at 130yen/$). Hiro often muses that if he'd have just put his funds in a savings account earning .1% interest, he'd have been closer to 66 million yen by now. More than that if he'd have mixed in some Japanese government bonds at around 1%, as most Japanese seem to do. It didn't seem that bad a couple years ago if he used dollars instead of yen, but that's changed as well. Maybe he should get into foreign stocks too? He's read that the S&P500 has had good returns the last few years, but then he'll have to worry about the exchange rate as well…
- Jan 1999: Nikkei is at 14,000 (down 10%). Retirement account is about 51 million yen ($443,000 at 115yen/$). Hiro is ready to throw in the towel and give up his crazy dream. It's been ten years. The Nikkei seems to be going nowhere, if not stumbling downward. His kids are getting older and starting to get more expensive as they begin juku cram schools and try to get into better private junior high and high schools in hopes of getting into a good university. It's not that bad, he reflects. His job is stable. Japan has no inflation to speak of, so prices for most goods barely change, and sometimes go down. National health care is universal and price-controlled. Most Japanese seem to rely on the national pension system for their incomes in retirement, supplemented with savings in plain savings accounts, government bonds, maybe some foreign currency bonds and similar exotic items. Few others seem to have significant savings invested in equities, and who can blame them after the economy blew up, disappearing all that wealth with no sign that it will be coming back? Hiro's family can plan out what their expenses will likely be for the next several decades and save accordingly. Getting rich in the stock market and retiring to island paradise was a nice dream though…
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Of course there's no guarantee that the next drop will work out so well for a good asset allocation strategy
The quoted portion of your post has been the theme (and the point) of the discussion in this thread. Sure, your Coffee House Portfolio would have been the better bet for the 1972-investor. But if you expand your dataset to include the entire historical record instead of that cherry-picked period of stock-investing calamity, then a stock-heavy (100% or close to it) allocation would have been your best bet. As long as you're using history as a guide, diversifying your asset allocation to include conservative assets actually decreased your chances of portfolio success (in addition to leaving you with a smaller portfolio ending value). But the whole point is that you can't necessarily use history as a guide (even though we may have no better option), because who the hell knows what will happen in the future?
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Between FrugalExpat and JamesAt15's posts, geographic and asset diversification seems to be the key.
I also appreciate the visceral experience of going through stock market collapses as provided in skyrefuge's post.
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Our story begins as we approach the end of the 1980s...
That was an excellent, thoroughly enjoyable read. Thanks for putting it together! No one can doubt your commitment to Sparkle Motion.
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Our story begins as we approach the end of the 1980s...
That was an excellent, thoroughly enjoyable read. Thanks for putting it together! No one can doubt your commitment to Sparkle Motion.
Yeah, nice work James! Definitely a worthwhile read.
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Of course there's no guarantee that the next drop will work out so well for a good asset allocation strategy
The quoted portion of your post has been the theme (and the point) of the discussion in this thread. Sure, your Coffee House Portfolio would have been the better bet for the 1972-investor. But if you expand your dataset to include the entire historical record instead of that cherry-picked period of stock-investing calamity, then a stock-heavy (100% or close to it) allocation would have been your best bet. As long as you're using history as a guide, diversifying your asset allocation to include conservative assets actually decreased your chances of portfolio success (in addition to leaving you with a smaller portfolio ending value). But the whole point is that you can't necessarily use history as a guide (even though we may have no better option), because who the hell knows what will happen in the future?
Actually, it seems that was supposed to be the theme of this thread, but it changed paths into worrying about past crashes.
But to the rest of your post, I challenge the assumption that 100% stocks has outperformed across the historical record. Virtually any intelligent asset allocation strategy (all with bond holdings in excess of 20%) has yieled a CAGR of between 8%-11% from the 1970s to today (see http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/ (http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/)). A Coffeehouse allocation has yielded 10.54%. The S&P has yielded 10.48%. Asset allocation has outperformed in the crashes but still makes (a bit less) money in the bull runs.
However, I agree that if your goal is to make the most investing, then a stock heavy allocation is your best bet, you will probably have some good bull markets in the mix that will peak above a more conservative mix. The present day bull market is an example of that, where the S&P average is about 1% higher than the average AA strategy. But, if your goal is to retire soon and live off investment income, then you need to smooth out the crashes, because volatility will kill your portfolio just as much as poor average returns when you are making regular withdrawals, which is the opposite of dollar-cost averaging.
Yes, I already made the point about how history doesn't guarantee the future, but most of this thread has been about worrying about history. You needn't worry about retiring in 1973 or 2001 if you have a good AA strategy, but you do have to worry about them if you have 100% stock strategy.
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James,
I was literally about to throw in the towel and make the Japan post, but you did far better than I ever would've done. Thank you for the numbers and the narrative!
The lesson I take from that is, though it would be an extremely difficult ride, the dude still about doubled his NW in 10 years. His returns were atrocious, of course, but the lesson that I mentioned earlier still holds - if you save aggressively, you can weather almost all storms.
I'm going to provide an extension to your story, with much less narrative. Again, I'm assuming the same salary ($56,000) and savings rate (50%), but I am eliminating any bonuses. Basically I'm saying that this guy never moves up because the older generation refuses to retire and that salaries languish. I'm also not going to play with exchange rates.
Jan 2000 (up 35.2%): Hiro (my favorite Japanese name, btw) and his wife's portfolio sits at $627,125. Is this a bubble or will tech change the world?
Jan 2001 (down 27.2%): The family portfolio takes yet another major hit and Hiro has now decided it will never truly recover. $484,547
Jan 2002 (down 23.5%): Hiro has definitely left the Hawaii dream in the dustbin, but his home is now mortgage-free, his kids are doing well in school, and he still has a job. Furthermore, after the 9/11 attacks in the US and the subsequent market correction there, Hiro counts his blessings and keeps chugging along, despite the Japanese stock market misery. $398,678.
Jan 2003 (down 18.7%): Continued misery. $352,125.
Jan 2004 (up 24.5%): The American recovery continues and Hiro thinks that perhaps a Japanese recovery is beginning, too. $466,396.
Jan 2005 (up 7.6%) It isn't the 10% he hopes for, but it is definitely a positive. $515,115. The family's NW is recovering. $494,397.
Jan 2006 (up 40.2%): "JACKPOT," screams Hiro. His Hawaii dreams are back on the table! $721,144. A massive increase in NW and the highest NW yet achieved by the family.
Jan 2007 (up 7.5%): Hiro continues planning the possible Hawaii move since his children are out of college and off on their own. Perhaps his perseverance will be rewarded? $803,299.
Jan 2008 (down 8.3%): Is this a small correction? The American market has cooled somewhat and in a few months there will be a historic rescue of a firm called "Bear Sterns." Hiro continues researching visas and housing in Hawaii. $764,561.
Jan 2009 (down 42.2%): "Those fucking Americans and their profligate ways," Hiro exclaims. "There are damn strawberry farmers with $300,000 homes and Wall St fat cats are gambling with other people's money and government-insured deposits." Hiro is angry, but somehow he continues to be a consistent Nikkei investor. $469,916.
Jan 2010 (up 17.3%): "We will need a lot more than this to get to Hawaii," Hiro states, pensively. $579,212.
Jan 2011 (down 3.0%): Hiro sighs. $589,835.
Jan 2012 (down 17.3%): Hiro's wife wonders if the American book, Stocks for the Long Run, that Hiro loves was right. $515,794.
Jan 2013 (up 22.9%): Hiro thinks that this is probably just another tease before a major correction. $661,911.
Jan 2014 (up 56.7%): "WE ARE MILLIONAIRES (in USD)," exclaims Hiro. Hiro decides that he needs OMY before he and his wife will be reclining on a beach in Hawaii. $1,065,214.
Jan 2015 (up 7.1%): $1,168,844. Hiro and his wife decide that they've saved enough. This portfolio, which they will now transition to a much more conservative allocation (60/30/10), will give them a retirement income of over $45k/year, before even considering their pensions.
Furthermore, they'll rent their paid-off home to one of their children for a reduced rate, since he is a grade-school teacher in Tokyo. This will give them $800/month in income and they won't have to worry about property management since their son is the most responsible person they know. He is extremely grateful for their generosity and even makes improvements to the property without them knowing, increasing its value.
Hiro and his wife realize that they are nowhere near as rich as they had envisioned, but they're still where they want to be. Their children are happy and well-adjusted. Their son is married with a grandchild on the way and their daughter lives with her longtime partner. The Americans in Hawaii are incredibly friendly, so they've made a ton of friends.
If they could do it again, they would've owned some bonds and had some more international diversification. But, through savings and dedication, they achieved their goal despite the difficulties.
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Thanks for the kind words about my Japanese investor post. I hope it was useful. Sorry about the length - I tend to ramble on once I get started.
One of the things I was trying to hint at was that the Japan lost decades scenario is unlikely to occur in the US because Japan is different in a lot of ways. Japanese investors are generally much more risk-averse. Japanese society seeks stability. We've had negligible inflation, if not outright deflation, as long as I can recall. Et cetera. I think most people here understand this without even knowing the details, but sometimes you see a post (on some other message board) that reads, "yeah, but what about JAPAN, man?!" and gears kinda grind.
The point is still valid that we don't know what bad scenarios may play out in the future. I agree that diversification is important, even if we sacrifice a bit of gain in order to reduce volatility. We also need to be as learned in our opinions and our asset allocations as we can, because a bad time will really try us, and we will probably need to be unreasonably sure of ourselves to stay the course we have chosen.
My Japanese protagonist invested 100% in equities is really, really rare, for example. I did a quick poke around to see if my impressions were way off, and after finding some articles like this link (http://www.jp-bank.japanpost.jp/en/aboutus/pdf/en2009_05.pdf), I don't think I am. The average Japanese household's retirement savings is only about 6% in equities, compared with 32% for the US. They hold about 3% in bonds, and 55% (!!) in cash and deposits (earning maybe 0.1% annually).
So Hiro is a bit of a freak to begin with, and after a few years of horrid returns, his doubts about his plan are going to be very strong. If he makes the mistake of telling his parents and in-laws about his family's investments, they will gasp in shock. They will equate it with gambling their life savings on foreign exchange day trading. They will begin pressuring him to give up his crazy plan of buying so many stocks, for their daughter's sake, for their grandchildren's sake. He and his wife's resolves may falter, and they may decide that stock trading is best left for the professionals and switch their investments to cash savings, time deposits, some Japanese government bonds, and life insurance policies. Like everyone else.
Of course we know that he would do better to stay the course. Or even better, switch to a diversified plan with some bonds, some real estate, and some foreign stocks, and trust that the additional complexity and new risks will work out well for him. But he will want to be very, very quiet about what he is doing, and very, very sure of himself.
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1972 was a bad time to retire, as were the years in the mid/late 1960s. The biggest fear I have with investing is having a repeat of the flat (negative real) 20 years from 1965 to 1985.
As for the original purpose of the thread: 1-3 years until next downturn (2016-2018). I don't foresee it being as insane as 2008/2009 was. something akin to 1990 or 1987.
Current things that could set it off: healthcare, student loans, commercial real estate, social media.
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I challenge the assumption that 100% stocks has outperformed across the historical record. Virtually any intelligent asset allocation strategy (all with bond holdings in excess of 20%) has yieled a CAGR of between 8%-11% from the 1970s to today (see http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/ (http://mebfaber.com/2013/07/31/asset-allocation-strategies-2/)). A Coffeehouse allocation has yielded 10.54%. The S&P has yielded 10.48%. Asset allocation has outperformed in the crashes but still makes (a bit less) money in the bull runs.
Just looking at the effect of stock/bond mix on portfolio performance for a standard retirement drawdown strategy, there hasn't been a retirement-length (30-year+) period in the entire history of the markets in the U.S. where an extremely stock-heavy portfolio (100% or near-100% stocks) did not outperform bond-heavier allocations both in terms of avoision of portfolio failure (depletion to zero) and in terms of achievement of higher terminal portfolio value. This can be confirmed by examining the historical data using cFIREsim.com.
Admittedly, this analysis is limited to U.S. markets and ignores international exposure. But with that limitation in mind, holding bonds has never been helpful for investors having long enough time horizons, even accounting for the "reverse dollar-cost averaging" effect of regular withdrawals (except to the extent that holding bonds "helped" in the sense their stabilizing effect on volatility psychologically enabled the investor to avoid abandoning the plan and stay the course--which is to say, they never outperformed an extremely-stock-heavy plan as long as the extremely-stock-heavy plan was actually followed).
This has been discussed here a bunch of times at length; see, e.g.:
http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/
And subsequently Go Curry Cracker put together what I now consider the definitive post on the topic:
http://www.gocurrycracker.com/path-100-equities/
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Thanks for the kind words about my Japanese investor post. I hope it was useful. Sorry about the length - I tend to ramble on once I get started.
One of the things I was trying to hint at was that the Japan lost decades scenario is unlikely to occur in the US because Japan is different in a lot of ways. Japanese investors are generally much more risk-averse. Japanese society seeks stability. We've had negligible inflation, if not outright deflation, as long as I can recall. Et cetera. I think most people here understand this even knowing the details, but sometimes you see a post (on some other message board) that reads, "yeah, but what about JAPAN, man?!" and gears kinda grind.
The point is still valid that we don't know what bad scenarios may play out in the future. I agree that diversification is important, even if we sacrifice a bit of gain in order to reduce volatility. We also need to be as learned in our opinions and our asset allocations as we can, because a bad time will really try us, and we will probably need to be unreasonably sure of ourselves to stay the course we have chosen.
My Japanese protagonist invested 100% in equities is really, really rare, for example. I did a quick poke around to see if my impressions were way off, and after finding some articles like this link (http://www.jp-bank.japanpost.jp/en/aboutus/pdf/en2009_05.pdf), I don't think I am. The average Japanese household's retirement savings is only about 6% in equities, compared with 32% for the US. They hold about 3% in bonds, and 55% (!!) in cash and deposits (earning maybe 0.1% annually).
So Hiro is a bit of a freak to begin with, and after a few years of horrid returns, his doubts about his plan are going to be very strong. If he makes the mistake of telling his parents and in-laws about his family's investments, they will gasp in shock. They will equate it with gambling their life savings on foreign exchange day trading. They will begin pressuring him to give up his crazy plan of buying so many stocks, for their daughter's sake, for their grandchildren's sake. He and his wife's resolves may falter, and they may decide that stock trading is best left for the professionals and switch their investments to cash savings, time deposits, some Japanese government bonds, and life insurance policies. Like everyone else.
Of course we know that he would do better to stay the course. Or even better, switch to a diversified plan with some bonds, some real estate, and some foreign stocks, and trust that the additional complexity and new risks will work out well for him. But he will want to be very, very quiet about what he is doing, and very, very sure of himself.
I completely agree and you're welcome. I just noticed that you're posting from Tokyo - so that's pretty cool.
Obviously I was choosing a worst case scenario and I definitely did not mean to say that it is something in the cards for American equities. I also agree that 100% equities is exceedingly rare. I'm taken aback by how few equities Japanese investors own - wow. I'm torn between being impressed and depressed by the American numbers. As you stated, people probably have real estate, some bonds, maybe REITs, etc. Hiro's portfolio would've looked way better and weathered the storm to a much greater degree had he been, say 80/20 and we included his home that I conveniently added at the end of the story.
Again, please rest assured that I wasn't playing the Japan card in the way that some people may have thought. I only wanted to pick yet another worst-case and recent scenario to test our collective psychology on dealing with prolonged downturns. Honestly, I think that if we get a 3+ year downturn we'll even see 'death of equities' posts around forums like this one, bogleheads, and others.
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One point about the Japan scenario, 55% in cash would likely have included Japanese housewives borrowing yen at zero interest rates to sell and purchase mainly AUD plus maybe a few other currencies (NZD/ZAR/TRY/etc). There have been several times since 1990 where a carry trade has paid massive returns if you were well-leveraged.
Also, until the introduction of the NISA product two years ago, Japan has not really had a good option for tax-sheltered investing. My question is, how much of the stock market "growth" in the US/Canada/Australia/UK/etc has been respectively due to schemes like IRAs/RRSPs/Superannuation/ISA/etc causing money to pile in?
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FYI, in today's post Go Curry Cracker (in typically excellent fashion) went through a similar mental exercise of envisioning a worst case early retirement scenario (but wearing rose colored glasses instead of the shit brown ones we've been sporting in this thread):
http://www.gocurrycracker.com/the-worst-retirement-ever/
(Edit: corrected link)
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FYI, in today's post Go Curry Cracker (in typically excellent fashion) went through a similar mental exercise of envisioning a worst case early retirement scenario (but wearing rose colored glasses instead of the shit brown ones we've been sporting in this thread):
http://www.gocurrycracker.com/the-worst-retirement-ever/
(Edit: corrected link)
Popular topic trending...
Mike & Lauren
http://www.mikeandlauren.com/the-economy-is-about-to-collapse-but-that-doesnt-change-our-plans/
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FYI, in today's post Go Curry Cracker (in typically excellent fashion) went through a similar mental exercise of envisioning a worst case early retirement scenario (but wearing rose colored glasses instead of the shit brown ones we've been sporting in this thread):
http://www.gocurrycracker.com/the-worst-retirement-ever/
(Edit: corrected link)
Popular topic trending...
Mike & Lauren
http://www.mikeandlauren.com/the-economy-is-about-to-collapse-but-that-doesnt-change-our-plans/
Yeah. The YouTube video was very good. Basically what I say too. I don't care what the economy does and it will not deter me from investing. Why? If shit really did hit the fan, that means the market -> 0 which would only happen if enough people died to cause a societal collapse (50% population decline isn't close to enough). The likely outcome is me being dead; and if I'm not, I am positive that I will endure with the skills I have learned. If such an event does not occur, then I will live a life of luxury for half my life or more.
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Go Curry Cracker's post was good, I wonder if he was reading our thread?
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And I'll fall back to my prior post.. the "worst time for FIRE" was an awesome time to be in the accumulation phase.
http://forum.mrmoneymustache.com/investor-alley/what-will-the-next-10-correction-look-like/msg633997/#msg633997
We can just hope we don't end up with a 1973 as our retirement date, but even if we do, apparently it won't be that bad. Thanks Curry man!
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What if it is half of your accumulation phase and the first years of your retirement? That would also be unfavorable!
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"People think [venture capitalists] are just throwing money at everything. If people think it is a bubble, then it is not a bubble. A bubble is what happens when you have total capitulation and everybody believes it is going up forever. That is what happened in 1999. No one was saying it was a bubble." - Ben Horowitz
Since everyone is saying "the stock market is overvalued" it may actually mean that the stock market is not in fact overvalued.
(edit: typo)
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"People think [venture capitalists] are just throwing money at everything. If people think it is a bubble, then it is not a bubble. A bubble is what happens when you have total capitulation and everybody believes it is going up forever. That is what happened in 1999. No one was saying it was a bubble." - Ben Horowitz
Since everyone is saying "the stock market is overvalued" it may actually mean that the stock market is not in face overvalued.
It's not a bubble, but bubbles aren't the only times the markets go down
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"People think [venture capitalists] are just throwing money at everything. If people think it is a bubble, then it is not a bubble. A bubble is what happens when you have total capitulation and everybody believes it is going up forever. That is what happened in 1999. No one was saying it was a bubble." - Ben Horowitz
Since everyone is saying "the stock market is overvalued" it may actually mean that the stock market is not in fact overvalued.
(edit: typo)
People were totally saying it was a bubble in 1999. Even in 1997.
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"People think [venture capitalists] are just throwing money at everything. If people think it is a bubble, then it is not a bubble. A bubble is what happens when you have total capitulation and everybody believes it is going up forever. That is what happened in 1999. No one was saying it was a bubble." - Ben Horowitz
Since everyone is saying "the stock market is overvalued" it may actually mean that the stock market is not in face overvalued.
It's not a bubble, but bubbles aren't the only times the markets go down
Okay just gotta say lovin' your avatar or whatever the hell the tiny picture is called.
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What if it is half of your accumulation phase and the first years of your retirement? That would also be unfavorable!
Not sure what you mean. If you retired in, say, 1979, I think you did pretty dang well.
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According to CNBC every single day, we're about to have a stock market collapse of 40% or more, so everybody buy gold and ammunition!
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The next year, he gets his wish, a 2008-like crash. But little does he know, he's getting served the 1970s "recovery" to go with it. Here is his thought process:
- 2016 - down 24%: "Sweet! FINALLY I get to buy stocks 'on sale'!"
- 2017 - down another 34%: "Even better! Now I'm getting stocks on SUPER-sale! This is exactly like that 2008 crash; when the bounce-back comes I'm gonna be soooo golden! (though hopefully it comes soon, because I have to admit I am a little freaked out seeing how low my portfolio balance is today...)"
- 2018 - up 30%: "Yep, the recovery's right on schedule! Though now I'm actually a little sad it didn't stay down longer, I wouldn't have minded another year to keep buying on sale..."
- 2019 - flat: "Awesome! I can't believe how this market keeps granting my wishes...a nice little pause here while halfway-recovered to allow me to continue purchasing shares at a discount before we return back up the rest of the way".
- 2020 - down 11%: "Hmm, that's not what was supposed to happen! I was kind of expecting to declare myself FI this year, but I guess I'll have to wait for next year's recovery now..."
- 2021 - up 3%: "ok, that helps a little, but I'd be FI now if I'd just gotten those 'boring' 7% returns rather than this stupid crash. :-( Well, I guess next year will be the year."
- 2022 - up 1%: "what the fuck guys, this joke is starting to get a little old... If I hadn't been adding things, my 2015 portfolio would still be down 36%, and that was 7 years ago...I'm starting to wonder if I was sold a bill of goods on this stock market bullshit. :-(("
- 2023 - up 13%: "OK! Fucking finally! If we keep going at this rate, by next year the market will be fully recovered."
- 2024 - down 10%: "FFFFFFFUUUCKKK YOUUUUUUUUU!!!!! THIS BULLSHIT IS ALL FUCKING BULLSHIT!!!! I WAS SUPPOSED TO BE RETIRED 5 YEARS AGO!!! Ok, ok, despite all this bullshit and the world dicking me over, the five extra years I've spent slaving away at a job I hate may have let me accumulate enough wealth to declare myself FI by now, but that was under THE OLD RULES. The stock market clearly doesn't work anymore as a tool to build wealth, so there's no fucking way that "4% SWR" bullshit is going to hold going forward, which makes my planned 60-year (now 55-year) retirement a fucking childish pipe-dream. I'm selling all my stocks and putting it in gold. Peace out, assholes."
Again, there's no reason to believe that 1972 crash will be exactly repeated, but there's also no reason to think a 2008 scenario is more likely to happen than the 1972 scenario. And especially not just because that's what happened most recently.
The 70's really were a living hell...
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Not sure what you mean. If you retired in, say, 1979, I think you did pretty dang well.
I meant back it up like 5 years. Start the retirement in say, 1974.
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Not sure what you mean. If you retired in, say, 1979, I think you did pretty dang well.
I meant back it up like 5 years. Start the retirement in say, 1974.
1965 - 1985 was not a good 20 years. That's what scares me with FIRE and why I want non-market sources of income in addition to market sources. If 25x expenses is all you've got and real returns were flat/negative for that long, you'd run out if you only are in the market. Yay diversification.
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Not sure what you mean. If you retired in, say, 1979, I think you did pretty dang well.
I meant back it up like 5 years. Start the retirement in say, 1974.
Still seems to yield a pretty satisfactory retirement. Backtesting from 1974 through 2013 results in a 7.75 CAGR and at no point does your portfolio decline below the initial amount. I tested it with 100% US equities, $210k to start (25x annual spending of $8401 which is $40k in today's dollars), 4% annual withdrawals, you end up with almost $3mm by 2013. Seems like 1974 was a great time to retire if you had the money.
What am I missing?
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NICE! probably meant to pick a slightly earlier start year. Run the same numbers for a retirement commencing in 1973, and it fails miserably.
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NICE! probably meant to pick a slightly earlier start year. Run the same numbers for a retirement commencing in 1973, and it fails miserably.
Well, he was responding to my point that while 1972 was a lousy year to retire, that period was a great time to be in the accumulation phase thanks to strong returns post-1972.
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Oh, good point - I agree with you, and I'm not sure what NICE meant -- the poor returns that are a bad thing for retirees in the withdrawal phase are necessarily a good thing for aspiring retirees still in the accumulation phase (except to the extent they are correlated with other bad consequences that might befall accumlators, like lay-offs).
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Overlook, first - love the name and avatar.
Second, apparently my brain doesn't work well. I meant to subtract 5 years from your original number. Maybe I was half-asleep the first time I posted?
Anyway, we're just tossing around worst case scenarios around here. I think what is more likely, as others have noted, is for a future worst-case scenario to look nothing like the past ones. We're all looking for a zig and the markets are going to zag on us. How do we protect our psyche from that?
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Overlook, first - love the name and avatar.
Second, apparently my brain doesn't work well. I meant to subtract 5 years from your original number. Maybe I was half-asleep the first time I posted?
Anyway, we're just tossing around worst case scenarios around here. I think what is more likely, as others have noted, is for a future worst-case scenario to look nothing like the past ones. We're all looking for a zig and the markets are going to zag on us. How do we protect our psyche from that?
Thanks!
I agree, future market downturns will look different and feel apocalyptic to us. So I also wonder - how do we protect from ourselves? Or our spouses? I find I still can't resist checking market returns too often. And I've not had serious skin in the game through the big downturns of the past. So while it felt like bargain hunting season in 2009 to me, what will it feel like now that I've got "big money" (to me) in the market? Only one way to find out. And I hope not to find out any time soon.
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Overlook, first - love the name and avatar.
Second, apparently my brain doesn't work well. I meant to subtract 5 years from your original number. Maybe I was half-asleep the first time I posted?
Anyway, we're just tossing around worst case scenarios around here. I think what is more likely, as others have noted, is for a future worst-case scenario to look nothing like the past ones. We're all looking for a zig and the markets are going to zag on us. How do we protect our psyche from that?
Thanks!
I agree, future market downturns will look different and feel apocalyptic to us. So I also wonder - how do we protect from ourselves? Or our spouses? I find I still can't resist checking market returns too often. And I've not had serious skin in the game through the big downturns of the past. So while it felt like bargain hunting season in 2009 to me, what will it feel like now that I've got "big money" (to me) in the market? Only one way to find out. And I hope not to find out any time soon.
Well there are ways to mitigate it, you don't necessarily have to throw your hands in the air and say, "Well I'll act how I'll act when it happens." Having a written plan, reduce your exposure to seeing market prices, the whole wisdom to tell the difference about things you can do something about and things you can't, and learning about how your reactions can sometimes be not in your best interests so learn how to act rather than react.
Because it will happen. There will several times in your life that you will lose significant amounts of money. Better to have a plan and have thought some deep thoughts on it rather than react to it.
Not that you necessarily will. You is meant more generally in this context.
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Well there are ways to mitigate it, you don't necessarily have to throw your hands in the air and say, "Well I'll act how I'll act when it happens." Having a written plan, reduce your exposure to seeing market prices, the whole wisdom to tell the difference about things you can do something about and things you can't, and learning about how your reactions can sometimes be not in your best interests so learn how to act rather than react.
Because it will happen. There will several times in your life that you will lose significant amounts of money. Better to have a plan and have thought some deep thoughts on it rather than react to it.
Not that you necessarily will. You is meant more generally in this context.
Here's the thing though; even with all the prep work in the world you don't actually know how you'll react to a situation - any situation - until you go through it for real.
I agree there are ways to prepare for it but the true test is to have it really occur and study your own reactions.
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Well there are ways to mitigate it, you don't necessarily have to throw your hands in the air and say, "Well I'll act how I'll act when it happens." Having a written plan, reduce your exposure to seeing market prices, the whole wisdom to tell the difference about things you can do something about and things you can't, and learning about how your reactions can sometimes be not in your best interests so learn how to act rather than react.
Because it will happen. There will several times in your life that you will lose significant amounts of money. Better to have a plan and have thought some deep thoughts on it rather than react to it.
Not that you necessarily will. You is meant more generally in this context.
Here's the thing though; even with all the prep work in the world you don't actually know how you'll react to a situation - any situation - until you go through it for real.
I agree there are ways to prepare for it but the true test is to have it really occur and study your own reactions.
Based on the last two crashes,or, really, any "disaster", I tend to get super excited. Not sure why, but it energizes me and so I highly doubt I'll be afraid when the bottom drops out of the market. I'll be excited for the opportunity it'll afford me. I am very positive when it comes to the future. I plan for the worst but expect the best. It's a good way to be :D.
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Based on the last two crashes,or, really, any "disaster", I tend to get super excited. Not sure why, but it energizes me and so I highly doubt I'll be afraid when the bottom drops out of the market. I'll be excited for the opportunity it'll afford me. I am very positive when it comes to the future. I plan for the worst but expect the best. It's a good way to be :D.
Maybe it won't look like a disaster. Maybe inflation will be high at say, 6%, and stock returns will be near-normal at say, 8%. That's only a 2% real return. That will have a pretty big effect on things.
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Based on the last two crashes,or, really, any "disaster", I tend to get super excited. Not sure why, but it energizes me and so I highly doubt I'll be afraid when the bottom drops out of the market. I'll be excited for the opportunity it'll afford me. I am very positive when it comes to the future. I plan for the worst but expect the best. It's a good way to be :D.
Maybe it won't look like a disaster. Maybe inflation will be high at say, 6%, and stock returns will be near-normal at say, 8%. That's only a 2% real return. That will have a pretty big effect on things.
I hope for a 1987 style crash (followed by the rise through 2000), but prepare for a 1965-1985 type scenario (where 2008 is roughly equivalent to 1965). High inflation with flat nominal returns ain't good.
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Here's the thing though; even with all the prep work in the world you don't actually know how you'll react to a situation - any situation - until you go through it for real.
I agree there are ways to prepare for it but the true test is to have it really occur and study your own reactions.
There have been a bunch of threads aimed at providing a taste of what it feels like to live through the type of sharp crash the market has most recently seen (sort of like how this thread turned into an incubator for thought experiments on worst case accumulation/retirement scenarios). This was a good, pretty recent one:
http://forum.mrmoneymustache.com/investor-alley/what-does-100-equities-feel-like/
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I hope for a 1987 style crash (followed by the rise through 2000), but prepare for a 1965-1985 type scenario (where 2008 is roughly equivalent to 1965). High inflation with flat nominal returns ain't good.
Oh it is definitely bad, which is why I mentioned it. I think that a bunch of people would actually not notice it for some time if stocks kept performing at near-normal levels.
Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands. You could be seeing your stache grow without paying the necessary attention to inflation-driven increases in spending.
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I hope for a 1987 style crash (followed by the rise through 2000), but prepare for a 1965-1985 type scenario (where 2008 is roughly equivalent to 1965). High inflation with flat nominal returns ain't good.
Oh it is definitely bad, which is why I mentioned it. I think that a bunch of people would actually not notice it for some time if stocks kept performing at near-normal levels.
Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands. You could be seeing your stache grow without paying the necessary attention to inflation-driven increases in spending.
Definitely agree, thought I have an XIRR spreadsheet for this in google sheets. I 100% count inflation in whatever is going on. It's currently at -0.10% for whatever that's worth. Consider the opposite scenario where stocks are declining or sideways but inflation is negative so the real is positive. Both are odd and hard to see.
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Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands.
This argument gets bandied about all the time in early retirement circles, but I don't think it holds water. An early retiree's spending is just as susceptible to inflationary pressures as anyone else's, however minimal that spending may be. If anything, the frugal early retiree's spending is more affected by inflation, because most of the fat has already been trimmed from their spending.
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Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands.
This argument gets bandied about all the time in early retirement circles, but I don't think it holds water. An early retiree's spending is just as susceptible to inflationary pressures as anyone else's, however minimal that spending may be. If anything, the frugal early retiree's spending is more affected by inflation, because most of the fat has already been trimmed from their spending.
100% agree, and have argued the same for years.
"Oh, but you use less gas because you bike, so gas prices increasing doesn't affect you as much."
Wrong. The percentage of gas that's in your budget raises by the same percent as everyone else's.
It doesn't affect you as much dollar-wise, but that's not relevant to you individually.
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Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands.
This argument gets bandied about all the time in early retirement circles, but I don't think it holds water. An early retiree's spending is just as susceptible to inflationary pressures as anyone else's, however minimal that spending may be. If anything, the frugal early retiree's spending is more affected by inflation, because most of the fat has already been trimmed from their spending.
Likewise, I'm not convinced it holds water, either. However, I also doubt that the early retiree's spending should be more susceptible to inflation. If you take a gander around the forums (and I know you have), you'll see that very few early retirees are subsisting on ERE-style rock bottom retirement spending. Even the MMM-level spenders seem to be the minority. I think most early retirees have budgeted for a few luxuries like international travel and fancy-pants food. The price-conscious Mustachian should be more aware of prices than the average person and therefore quicker to make substitutions (for things like food), repairs instead of replacement (for durable goods - cars, appliances, clothes, etc.) and deferred spending (for things like travel). Obviously it would be undesirable to reduce spending permanently, but, equities should catch up...eventually. Of course, the '70s taught us that it can take a while, but I still don't think that inflation should be able to outpace equities forever, unless the economy is dying, in which case, we're screwed anyway. But, that's just one optimist's take on the situation.
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However, I also doubt that the early retiree's spending should be more susceptible to inflation.
I agree. Who argued it would?
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Now, of course, we all know that the traditional inflation measures won't have nearly the effect on us MMMers as the rest of the population, but the point still stands.
This argument gets bandied about all the time in early retirement circles, but I don't think it holds water. An early retiree's spending is just as susceptible to inflationary pressures as anyone else's, however minimal that spending may be. If anything, the frugal early retiree's spending is more affected by inflation, because most of the fat has already been trimmed from their spending.
Everyones inflation case is a bit personal. Last years inflation was about 1.5%. But food was up ~3 % while energy was down ~15%. The early retiree with an average food budget and below average energy budget felt inflation a lot more. When energy prices were going through the roof, things worked out different. Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
From the original post 10% isn't even a correction. It is just random variance. You get 10% swings every couple years. They just don't matter. When you get to the ~20% corrections (something like 2011) is when people start panicking. At that point you have no way of knowing if they markets are about to bounce back or lose another 20%. But again it really doesn't matter. If you need money fro 40-50 years you are going to face 3-4 of these cycles. Unless you are doing some market timing (good luck), it just isn't worth worrying about.
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However, I also doubt that the early retiree's spending should be more susceptible to inflation.
I generally agree, and that's why I qualified my statement with the conditional "if anything" :)
But it is true that even the non-rock-bottom MMM-level spenders aren't swimming up at the surface with the "consumer sucka" masses, so there is still less trimmable fat and spending-substitution flexibility than in the average person's budget. (Whether the spender has more awareness of that fact is a different issue, and I agree with you that the average early retiree probably does.)
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However, I also doubt that the early retiree's spending should be more susceptible to inflation.
I agree. Who argued it would?
That was a response to brooklynguy, not you. You posted while I was writing my reply.
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Everyones inflation case is a bit personal. Last years inflation was about 1.5%. But food was up ~3 % while energy was down ~15%. The early retiree with an average food budget and below average energy budget felt inflation a lot more. When energy prices were going through the roof, things worked out different. Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
That's an excellent point. To Mud's point, it's good to have both price consciousness and flexibility in your budget so you can arbitrage between items with prices inflating at different rates, but there's only so much you can control -- if half your spending is on food, and prices for all food items are inflating at a high rate, there's not much you can do about it. Really the only example of someone not susceptible to inflation that I can think of would be someone entirely self-sufficient, living completely off the grid.
And welcome back, foobar :) I'm glad to see you here; I thought you had left us for greener pastures.
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brooklyn/arebelspy et al, my admittedly unscientific reasoning for this is based upon reading the posts of our fellow MMMers. I don't see a whole lot of inflation in this bunch. In fact, some people are managing to lower their spending every year, or at least hold it constant. I know that this isn't indicative of inflation/deflation per se, but it does demonstrate better price sensitivity in this community (as noted above).
I think a Mustachian will be much quicker to react to high inflation with lifestyle changes. For example, a bunch of us have been talking about steak recently and for better or worse (I'd say for worse), beef prices are linked to oil prices. So, if the price of oil jumps up again, causing steak to do so as well, I bet the people here will cut back on it more readily than the vox populi.
Again, I know that's unscientific and more representative of our collective flexibility to roll with the punches, but I do think it is germane to the discussion.
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brooklyn/arebelspy et al, my admittedly unscientific reasoning for this is based upon reading the posts of our fellow MMMers. I don't see a whole lot of inflation in this bunch. In fact, some people are managing to lower their spending every year, or at least hold it constant. I know that this isn't indicative of inflation/deflation per se, but it does demonstrate better price sensitivity in this community (as noted above).
But I think this results from the same recency bias that all the discussion in this thread about retirement-dream-killing market conditions was intended to dispel. Inflation has been very low in recent years, which is why you haven't seen a lot of it, and which is probably why it is not often discussed in early retirement circles (even though, as Rebs points out every now and again, it has historically been the early retiree's number one enemy).
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brooklyn/arebelspy et al, my admittedly unscientific reasoning for this is based upon reading the posts of our fellow MMMers. I don't see a whole lot of inflation in this bunch. In fact, some people are managing to lower their spending every year, or at least hold it constant. I know that this isn't indicative of inflation/deflation per se, but it does demonstrate better price sensitivity in this community (as noted above).
I think this is because most are in the "optimizing" phase. Naturally they can lower or keep it the same. After 15 years ER'd with an optimal budget, inflation will affect you, either by increasing costs, or cutting into your standard of living.
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...either by increasing costs, or cutting into your standard of living.
Sure, but it seems like we're pretty adaptable. There are one or two posters in here that have been FIRE for awhile and who have managed to keep spending in check. Of course, as brooklyn pointed out, our low inflation era certainly played into that but I think it wasn't just the numbers, I think it was our flexibility.
I think this is because most are in the "optimizing" phase. Naturally they can lower or keep it the same.
Maybe, although I think optimizing is an iterative process. I'm not convinced it is ever over.
But I think this results from the same recency bias that all the discussion in this thread about retirement-dream-killing market conditions was intended to dispel. Inflation has been very low in recent years, which is why you haven't seen a lot of it, and which is probably why it is not often discussed in early retirement circles (even though, as Rebs points out every now and again, it has historically been the early retiree's number one enemy).
Yes, that's true to an extent, but we're seeing people continuing to drop their expenses. I can't remember the poster's name, but there's a dude that keeps going sub-10k and doing better.
Again, we're probably all saying the same basic thing but emphasizing different parts of it.
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Never mind.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
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Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
Minor quibble. The ACA actually makes medical care dramatically less complicated. However, the partisan drama around the ACA makes it somewhat risky to rely on the continued existence of some of its provisions.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
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Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
Minor quibble. The ACA actually makes medical care dramatically less complicated. However, the partisan drama around the ACA makes it somewhat risky to rely on the continued existence of some of its provisions.
No ACA make the situation more complicated in predicting what will happen to your costs.. In the old days your rates would go up. It was a given. With ACA they might stay the same if the government subsidy takes care of the increase in premium. And yes trying to figure out what the healthcare situation will be in 5 years (much less 30 years) is taking a huge leap of faith. Early retirees are sort of exploiting a loophole (nobody really thinks that people with a million dollars in assets who chooses not to work should be getting subsidized health care) but it will be one that is hard to close as adding asset based testing (see FASFA) is pretty complex.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
(http://files.miffthefox.info/inflammable.jpg)
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Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
Minor quibble. The ACA actually makes medical care dramatically less complicated. However, the partisan drama around the ACA makes it somewhat risky to rely on the continued existence of some of its provisions.
No ACA make the situation more complicated in predicting what will happen to your costs.. In the old days your rates would go up. It was a given. With ACA they might stay the same if the government subsidy takes care of the increase in premium. And yes trying to figure out what the healthcare situation will be in 5 years (much less 30 years) is taking a huge leap of faith. Early retirees are sort of exploiting a loophole (nobody really thinks that people with a million dollars in assets who chooses not to work should be getting subsidized health care) but it will be one that is hard to close as adding asset based testing (see FASFA) is pretty complex.
Gotta disagree here. I said that if the ACA stays as is, you have no complication. I don't think that can be disputed. As is, the tax credits explicitly limit your premium cost to a percent of your income. And out-of-pocket max is also limited to inflation. This makes healthcare very non-complicated to plan for under current law.
Without the ACA you could never save enough to be certain that you had medical expenses covered (recision, pre-existing conditions, lack of guaranteed issue, etc)--which makes your savings calculation incredibly calculated.
The political uncertainty is the problem.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
YMMV
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
YMMV
You think it varies? It was a high octane burn!
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
YMMV
You think it varies? It was a high octane burn!
I'd keep this pun chain going, but I'm running on empty.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
YMMV
You think it varies? It was a high octane burn!
I'd keep this pun chain going, but I'm running on empty.
This pun chain's a gas, but shockingly, I drive electric. The experience gives me a real charge.
http://forum.mrmoneymustache.com/share-your-badassity/nissan-leaf-almost-paying-me-to-drive-it/
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Medical care is the other big one. Even if prices don't go up, you getting older can cause your costs to go up (obviously ACA makes this extra complicated).
Minor quibble. The ACA actually makes medical care dramatically less complicated. However, the partisan drama around the ACA makes it somewhat risky to rely on the continued existence of some of its provisions.
No ACA make the situation more complicated in predicting what will happen to your costs.. In the old days your rates would go up. It was a given. With ACA they might stay the same if the government subsidy takes care of the increase in premium. And yes trying to figure out what the healthcare situation will be in 5 years (much less 30 years) is taking a huge leap of faith. Early retirees are sort of exploiting a loophole (nobody really thinks that people with a million dollars in assets who chooses not to work should be getting subsidized health care) but it will be one that is hard to close as adding asset based testing (see FASFA) is pretty complex.
Gotta disagree here. I said that if the ACA stays as is, you have no complication. I don't think that can be disputed. As is, the tax credits explicitly limit your premium cost to a percent of your income. And out-of-pocket max is also limited to inflation. This makes healthcare very non-complicated to plan for under current law.
Without the ACA you could never save enough to be certain that you had medical expenses covered (recision, pre-existing conditions, lack of guaranteed issue, etc)--which makes your savings calculation incredibly calculated.
The political uncertainty is the problem.
We are saying the same thing. Without an ACA subsidy, your health care costs change with medical inflation and your aging. With ACA your health care costs change with inflation (NOT medical inflation) and aging (in most states). But if you are out of the subsidy range, you are back to your costs increasing with medical inflation. ACA is better but less predictable. Without it, you always pay medical inflation. With it, you can pay either medical or normal inflation depending on what your income does.
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We are saying the same thing. Without an ACA subsidy, your health care costs change with medical inflation and your aging. With ACA your health care costs change with inflation (NOT medical inflation) and aging (in most states). But if you are out of the subsidy range, you are back to your costs increasing with medical inflation. ACA is better but less predictable. Without it, you always pay medical inflation. With it, you can pay either medical or normal inflation depending on what your income does.
I think we're on the same page. Since you can control your income to a large degree (and generally within a range less than 400% FPL), you can control that variable. In the worst case, you're making "too much" money and can afford whatever the premiums are.
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Mustachians don't suffer from inflation because we readily switch to substitute goods. For example, when the price of beef went up earlier this year, I just started drinking gasoline.
You may not suffer from inflation, but you will surely suffer from inflammation.
Ooooh! Burn!
It was a premium insult.
YMMV
You think it varies? It was a high octane burn!
I'd keep this pun chain going, but I'm running on empty.
This pun chain's a gas, but shockingly, I drive electric. The experience gives me a real charge.
http://forum.mrmoneymustache.com/share-your-badassity/nissan-leaf-almost-paying-me-to-drive-it/
That's a shocker.