Author Topic: What would you do if you were me?  (Read 1481 times)

ATLInvestor

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What would you do if you were me?
« on: November 01, 2018, 02:11:54 PM »
Ok.. I am almost FIRE... generated a good amount of money over the past 4-5 years from being an entrepreneur.. 

I am early thirties and confident I can live off of my portfolio forever if I do this right.

I thought this would be as easy as dumping it all in a globally diversified portfolio and withdrawing 3% regularly and starting to really soak up life and enjoy short travels, reading books, long walks,  nice conversations etc..  things I haven't been able to do the last 5 years because everything the last 5 years has been about ROI on my time.

Literally running from one idea to the next.. pushing myself to limits to make the money I did.  It was fun but now I am really ready to FIRE and enjoy my son and life.

But actually so far FIRE has been the opposite.. I find myself almost obsessed with where the market is going.  I am always looking at it and when it drops 3% in a day I find it impacting my mood.  Especially now being down 6-7% I find myself scratching my head some days wondering if this is what I am in for the next 40-50 years of my life.

To make matters worse, one of my mentors swears we are going to hit a recession in the next 12 months and stocks will lose 40 to 50% value when this happens.  He keeps telling me how he has sold all his positions and is going to sit out 2019 and maybe even 2020.. He says that stocks are so overvalued and trading on air and that if he were me he would sell as soon as I can and wait it out.

What a mentor huh?  I mean this guy is a doctor and even wrote a book on the stock market 20 years ago so me in my early thirties, when he talks, I listen.  Maybe I shouldn't, but I do.

I gotta be honest that I thought this would be easier.. but honestly I find myself looking at the markets like it's almost a job.

I see two ways to go about this

A)  Sell everything after the stocks come up and make an IPS that says I will make regular deposts into VTI over the next 3-4 years until all my cash is invested and at that point I would start living off of it.. little chunks at a time.. and let the rest marinate in a 2% savings or CD.  I feel that this would calm my nerves a bit and let me adjust to the market volatility and dollar cost average the ups and downs.

B)  Keep my positions where they are (currently down about 6% as of today) ignore everything external,  and just ride it out up and down while withdrawing my 3% or resorting to my 2-3 years emergency savings during extremely bad times.

C)  Look for alternative and more stable investments that I can control outside of the stock market

What are your thoughts?

I do have financial commitments and a family.  So protecting my money and limiting exposure is important.

I am in 100% stocks.. combination of some dividend stocks, VTI, as well as wealthfront and betterment... looking at eventually moving everything to VTI as markets come back up.  I have no bonds but I do have 2.5 years of emergency cash in a 2% yielding savings.

Thank you!











« Last Edit: November 01, 2018, 02:21:05 PM by ATLInvestor »

ILikeDividends

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Re: What would you do if you were me?
« Reply #1 on: November 01, 2018, 02:25:35 PM »
Read this:

https://jlcollinsnh.com/stock-series/

The series is quite long, but it should give you a valuable perspective.

Once you are armed with the right perspective, choose an asset allocation that lets you sleep at night, and allows you to enjoy the other aspects of your life.

One specific point I would think long and hard about is your 100% allocation to equities.  That's not a terrible allocation for young folks who are still in the accumulation phase.  You are young, but you are no longer accumulating.  You need a more defensive asset allocation, in my opinion.
« Last Edit: November 01, 2018, 02:50:20 PM by ILikeDividends »

BicycleB

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Re: What would you do if you were me?
« Reply #2 on: November 01, 2018, 03:17:29 PM »
@ATLInvestor, I would have a slightly more diversified portfolio without paying management fees to Wealthfront and Betterment, but that's not the main issue. The main issue is, I would practice mental calmness, including but NOT limited to viewing my portfolio differently. Because any decent plan - yours or mine - will work.

The price of your stock portfolio doesn't matter, except when you're selling stock. If the amount you need to sell each year is 3% of current stock holdings in order to pay all family expenses without touching cash, then even if you leave the cash alone, a 50% drop in stock prices just means you sell 6%.  At that rate, your son will graduate from high school before you run out (16 years of stock plus 2 years cash = the kid can vote).

Do some research. When was the last time stock fell 50% in one year, then stayed at that low price for 16 years? (Every time I've checked for US markets, the answer has been "never". Let me know if you find something different!)  To get a view for how well your portfolio might survive, visit portfoliocharts.com and review the relevant charts, such as drawdown for 100% stock and for 90% stock 10% cash. Calculations of that type can assure you that you at least have many years to go, and thus do not need to worry yet.

How about this:  Make a step by step plan for market drops. Start with a certain date each year. Decide now what % drop from the prior year will cause you to use cash instead of stock to pay that year's expenses. Pretend that stock never rebounds after that, and calculate how long your funds will last. Then work your plan. Each year, follow the withdrawal procedure you decided. Then, each year, compare your results with the worst year on portfoliocharts.com for a similar portfolio.

If you do the above, and your total portfolio falls at least 10% below the previous worst drawdown ever, consider whether you wish to work some more or live a bit more cheaply. At that point and not before, act on your contingency plan, be it to work more or spend less. Until then, focus on enjoying life and being a good parent.

If necessary, get counseling to stay calm. If nothing else, read Marcus Aurelius' "Meditations" daily, and follow some suggestion from it every day. This paragraph alone will make you strong enough to handle anything your portfolio does.

Your advisor may be a smart guy. But there's a difference between smart and allowing someone else's fear to ruin your life. If you were broke or had a 5% withdrawal rate here at the starting stage of your retirement, I'd say consider working more. But at 3%, I say focus on calming your soul and enjoying your well-earned freedom. You've freed your finances from the entrepreneurial/workplace grind. Now you have to free your mind.

PS. In the meantime, if you do think about financial matters, maybe make the "Top is in" thread your destination. It's long community joke that reminds us to avoid market timing, and not to make hasty moves.  Your friend is market timing, and you want to do so also. Don't!!!

Perhaps the most practical suggestion is to turn off the screens and find engaging activities outside of conversing with your market timing pal. For example, can you take your son on long bike rides, ending in some slack lining in the woods, or some play at a park playground?  These are things that require in-the-moment attention, and are also fun for kids. Be a dad, not a market timer.
« Last Edit: November 01, 2018, 03:36:40 PM by BicycleB »

ATLInvestor

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Re: What would you do if you were me?
« Reply #3 on: November 01, 2018, 06:02:13 PM »
Read this:

https://jlcollinsnh.com/stock-series/

The series is quite long, but it should give you a valuable perspective.

Once you are armed with the right perspective, choose an asset allocation that lets you sleep at night, and allows you to enjoy the other aspects of your life.

One specific point I would think long and hard about is your 100% allocation to equities.  That's not a terrible allocation for young folks who are still in the accumulation phase.  You are young, but you are no longer accumulating.  You need a more defensive asset allocation, in my opinion.


Thank you!   I am reading the posts on that link and am finding them very interesting... especially outlining the 2008 crash.  Thank you for your reply


@ATLInvestor, I would have a slightly more diversified portfolio without paying management fees to Wealthfront and Betterment, but that's not the main issue. The main issue is, I would practice mental calmness, including but NOT limited to viewing my portfolio differently. Because any decent plan - yours or mine - will work.

The price of your stock portfolio doesn't matter, except when you're selling stock. If the amount you need to sell each year is 3% of current stock holdings in order to pay all family expenses without touching cash, then even if you leave the cash alone, a 50% drop in stock prices just means you sell 6%.  At that rate, your son will graduate from high school before you run out (16 years of stock plus 2 years cash = the kid can vote).

Do some research. When was the last time stock fell 50% in one year, then stayed at that low price for 16 years? (Every time I've checked for US markets, the answer has been "never". Let me know if you find something different!)  To get a view for how well your portfolio might survive, visit portfoliocharts.com and review the relevant charts, such as drawdown for 100% stock and for 90% stock 10% cash. Calculations of that type can assure you that you at least have many years to go, and thus do not need to worry yet.

How about this:  Make a step by step plan for market drops. Start with a certain date each year. Decide now what % drop from the prior year will cause you to use cash instead of stock to pay that year's expenses. Pretend that stock never rebounds after that, and calculate how long your funds will last. Then work your plan. Each year, follow the withdrawal procedure you decided. Then, each year, compare your results with the worst year on portfoliocharts.com for a similar portfolio.

If you do the above, and your total portfolio falls at least 10% below the previous worst drawdown ever, consider whether you wish to work some more or live a bit more cheaply. At that point and not before, act on your contingency plan, be it to work more or spend less. Until then, focus on enjoying life and being a good parent.

If necessary, get counseling to stay calm. If nothing else, read Marcus Aurelius' "Meditations" daily, and follow some suggestion from it every day. This paragraph alone will make you strong enough to handle anything your portfolio does.

Your advisor may be a smart guy. But there's a difference between smart and allowing someone else's fear to ruin your life. If you were broke or had a 5% withdrawal rate here at the starting stage of your retirement, I'd say consider working more. But at 3%, I say focus on calming your soul and enjoying your well-earned freedom. You've freed your finances from the entrepreneurial/workplace grind. Now you have to free your mind.

PS. In the meantime, if you do think about financial matters, maybe make the "Top is in" thread your destination. It's long community joke that reminds us to avoid market timing, and not to make hasty moves.  Your friend is market timing, and you want to do so also. Don't!!!

Perhaps the most practical suggestion is to turn off the screens and find engaging activities outside of conversing with your market timing pal. For example, can you take your son on long bike rides, ending in some slack lining in the woods, or some play at a park playground?  These are things that require in-the-moment attention, and are also fun for kids. Be a dad, not a market timer.



Wow... thank you for the well written reply.  I really appreciate it.   I am going to check out the Meditations and also try to increase my emergency cash fund a bit more.  I think I will actually try to meditate about a 50% crash and how I would feel, what changes I would need to make, etc.

It's a hard mental feeling.  Since I am new to FIRE and investing.  It scared me after this recent 7-9% downturn and how I felt.  I couldn't imagine how I would feel after a 40-50% crash.   I probably would need plenty of wine or some of those new cannabis infused beverages.  I'm not a big drinker but I just can't imagine how anyone living off of the stock market can't feel big time heat after losing 50% of their net worth and waiting it out.   The anxiety has to build.  I wasn't invested for 2008 but I can only imagine how people in retirement felt.   The heat has to build like a pressure cooker as you watch your nest egg dwindle because of a financial crisis that was created by greedy bankers.
« Last Edit: November 01, 2018, 06:05:17 PM by ATLInvestor »

Financial.Velociraptor

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Re: What would you do if you were me?
« Reply #4 on: November 01, 2018, 06:34:08 PM »

It's a hard mental feeling.  Since I am new to FIRE and investing.  It scared me after this recent 7-9% downturn and how I felt.  I couldn't imagine how I would feel after a 40-50% crash.

If normal 10% corrections make you nervous (they happen on average around every 7 months), your bond and fixed income allocation is too low.  It has been the hip thing around here lately to brag about how you've done the math and are 100% equities and you have the stones to take it...short sighted.  Historically, buy and hold investors turn into buy and fold investors.  Your psychology is probably the number one factor you can manage for better long term investing results.  I like 40% fixed income in early retirement...

shinn497

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Re: What would you do if you were me?
« Reply #5 on: November 01, 2018, 06:57:37 PM »


If I were you, I would learn about behavioural economics and focus on decreasing my fixed costs.

I would also highly recommend Big ERN's series on safe withdrawal rates and pay special attention to CAPE ratios.
« Last Edit: November 01, 2018, 06:59:47 PM by shinn497 »

JAYSLOL

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Re: What would you do if you were me?
« Reply #6 on: November 01, 2018, 07:27:07 PM »
If you can live on 3% and your mentor says he's going to sit out 2019 and maybe 2020, why not keep those 2 years or 6% in cash/cash equivalents?  That way you would never have to sell at rock bottom (if that happens in the next 2 years), but can stay 94% invested in the market.  Also, id echo the others suggesting you tune out the news, meditate, read up on jlcollins stock series and consider a 60/40-80/20 stock/bond allocation instead of all equities.  Oh, and congrats on being early 30's and FIRE, just enjoy it!  I'm early 30's and have a quite a long way to go, so live it up for me, lol

Andy R

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Re: What would you do if you were me?
« Reply #7 on: November 01, 2018, 08:14:29 PM »
To make matters worse, one of my mentors swears we are going to hit a recession in the next 12 months and stocks will lose 40 to 50% value when this happens. 

Lucky that he can predict the future. And lucky it seems nobody else can, not even people who get paid millions to manage portfolios..

Just for reference, people said this in 2013, 2014, 2015, 2016, 2017.
And there are threads of people who sold out in 2014-2015 and have missed out on 40% of gains since then. Others who sat out 2017 and missed out on 25% gains.

Explain to me why he can predict the future, and then explain why the rest of the market, which is mostly managed by professional fund managers, can't. If someone can explain that to me in a way that is not full of sh!t and half truths, I would listen.

I see two ways to go about this

A)  Sell everything after the stocks come up and make an IPS that says I will make regular deposts into VTI over the next 3-4 years until all my cash is invested and at that point I would start living off of it.. little chunks at a time.. and let the rest marinate in a 2% savings or CD.  I feel that this would calm my nerves a bit and let me adjust to the market volatility and dollar cost average the ups and downs.

B)  Keep my positions where they are (currently down about 6% as of today) ignore everything external,  and just ride it out up and down while withdrawing my 3% or resorting to my 2-3 years emergency savings during extremely bad times.

C)  Look for alternative and more stable investments that I can control outside of the stock market

What are your thoughts?

Why are your only options to either sell everything or sell nothing?
It sounds like your risk tolerance is lower than what you thought it was. Re-evaluate your risk tolerance to come up with a new asset allocation that you feel more comfortable with, even knowing that the market might go down 50% but that it also might have another 25% year next year.

swinginbeef

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Re: What would you do if you were me?
« Reply #8 on: November 02, 2018, 07:21:01 AM »
Think of it this way, if you're a strong enough badass to create enough wealth to retire in your early thirties at a 3% withdraw rate, you're plenty resourceful to figure out how to make it through just about anything. Say the market does drop 50%, you may have to earn a little bit on a temporary basis while your portfolio recovers, but you'll still be miles ahead of 95% of other people your age. You have an incredible talent for building wealth and could do it again if you were forced to.

Car Jack

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Re: What would you do if you were me?
« Reply #9 on: November 02, 2018, 07:31:13 AM »
If your portfolio is keeping you awake at night, your allocation is wrong.  Put more into bonds.  Pay off your mortgage.  Pre-pay your quarterly estimated taxes.  This takes more risk away.  Buy some CDs and iBonds.  Nothing wrong with any of that.  Nothing wrong with taking on work at a small scale.  Heck....you could go work for someone else part time.  It's not for the money, it's because you want to.

MissNancyPryor

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Re: What would you do if you were me?
« Reply #10 on: November 02, 2018, 07:40:32 AM »
snip quote:  Just for reference, people said this in 2013, 2014, 2015, 2016, 2017.

This is really important.  I recall one of our successful FIRE friends here once declared in his blog that he thought the market was "oversold" when it was at about 15K.  He has been retired for 3+ years and doesn't post much anymore.  I am sure he is fine and has been able to enjoy the 50%-plus run up since that number (Dr. Doom y'all). 

And that doesn't mean that today's number is way out of whack. 

JLCollins will help.  Don't make yourself sick; you could have stayed working and killed yourself that way.   



 

BrightFIRE

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Re: What would you do if you were me?
« Reply #11 on: November 02, 2018, 09:31:38 AM »
In addition to heartily recommending JLCollins stock series, you really just need to change your mindset. A year ago, people were delighted the market was at this number.

One thing that I sometimes do (for entertainment purposes after seeing some panicky financial headlines) is do a quick Google of SP500 - it brings up a little chart you can slide around. Oh noes! down 5%! the world is ending! - and then I look to see when it was last at that number. Turns out it was like a week ago. Big deal, it's a blip. Don't be a Chicken Little.

(It also amuses me that many people are all, "the market is overheated", but then when it takes a correction, instead of being relieved... they're upset.)

PizzaSteve

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Re: What would you do if you were me?
« Reply #12 on: November 02, 2018, 11:57:56 PM »
Good advice so far.

It is important to forget the past (and mostly the present too) with stocks.  In your business, if you lost a sale, did you dwell on it forever, or just move ahead.  I assume you focused on what you could control.

That is the key.  You have no control over market ups and downs.  You can control your asset mix and withdraw rate, so focus on those. Get into the habit of checking your allocation percentages, occasionally, but also completely ignoring what your portfolio is worth.  I know it feels good to admire your pile, and it seems odd, but its value now is meaningless.  Its value in perhaps 10 or more years, when you will sell a bit, is what matters.

Ive had days losing huge amounts of money on paper and totally dont pay attention, nor care any more.  I can watch the news and hear the market dropped 10%, and I think, hmm, in a couple of years I might need to sell something, hope it comes back up over the next few years.

This is because we have what we need this year in cash, income coming in from other assets, etc.  Stocks are my long term plan.

Enjoy reading about mindfullness and decompressing.  Stocks should be something you mostly ignore.
« Last Edit: November 03, 2018, 12:00:43 AM by PizzaSteve »

COEE

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Re: What would you do if you were me?
« Reply #13 on: November 03, 2018, 06:49:17 AM »
I would do three things immediately:

1) Actually read and understand The Trinity Study.  This is what has kick-started this whole 4% SWR thing.  You have a 3% SWR which changes the game even more than a 4% SWR.  The Trinity Study suggests that you can have nearly any asset allocation and be nearly guaranteed to survive the next 30 years!  The one exception is being 100% bonds.  Which you aren't.

2) Create an IPS - it sounds like you already know something about them.  You don't need to make changes to your portfolio, and then create an IPS.  You need to create an IPS, and then maybe you need to make changes to your portfolio.

3) If the recent volatility has kept you up at night you need a different asset allocation than 100% equity portfolio.  Consider a 70%/30%, 50%/50%, or even 25%/75% stock bond ratios.  Remember what you learned in task #1!  As long as you're not 100% bonds, you will more than likely at least survive the next 30 years.

ATLInvestor

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Re: What would you do if you were me?
« Reply #14 on: November 04, 2018, 05:33:06 PM »
Thank you so much for the replies!  I am going to diversify with more bonds and read up everything you all posted.

I wanted to ask, what do you guys think about dividend growth investing?

Investing in stocks that have a long track record of increasing their dividends year over year?

Does anyone purely invest in only dividend growth stocks and have a consistent track record?


Andy R

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Re: What would you do if you were me?
« Reply #15 on: November 04, 2018, 07:26:50 PM »
Thank you so much for the replies!  I am going to diversify with more bonds and read up everything you all posted.

I wanted to ask, what do you guys think about dividend growth investing?

Investing in stocks that have a long track record of increasing their dividends year over year?

Does anyone purely invest in only dividend growth stocks and have a consistent track record?

Discussed very often on bogleheads Or rather, asked often, and the same answer is given ever single time, which is, higher dividends means nothing for your overall return, and if anything, it can make you ignore the total return with you ending up getting a lower total return becuase you didn't think of the importance of total return.
https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311

shinn497

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Re: What would you do if you were me?
« Reply #16 on: November 04, 2018, 07:29:35 PM »
There is no one investment strategy that is proven to be the best. And you cannot extract past performance to future gains easily.

Be warned about attractive investment strategies and dont pick one entirely due to past or especially recent performance. This is called performance chasing and is detrimental.


ChpBstrd

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Re: What would you do if you were me?
« Reply #17 on: November 09, 2018, 03:44:07 PM »
But two years worth of bonds. This plus your two years of cash mean you could coast through a 4 year depression without selling a share of equity. Actually more than that because there's dividends and interest. Do the research on how often stocks are lower 5 years after any given date. It ain't often.

Also, I sleep a lot better now that I have most of my equity assets hedged with protective puts and collars. Instead of buying bonds I did this - more protection at a similar price.

Don't make either of these moves for a few months when the latest correction is over and volatility is low (i.e. VIX < 12).

Last, remember that in the markets you are literally paid in the long run for how much volatility you can stand.

TomTX

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Re: What would you do if you were me?
« Reply #18 on: November 09, 2018, 04:27:20 PM »
You're happy at a 3% withdrawal rate?

Basically if you're mostly or all in broad based low cost mutual funds - that's a WR that would have never have failed in modern US history. Great Depression? You will be fine. Stagflation? You will be fine.

A 40-50% market crash is meaningless.

Ignore the market, enjoy your life - play with your son.

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Re: What would you do if you were me?
« Reply #19 on: November 10, 2018, 08:54:43 AM »
Not sure any of the options A thru C seem to make sense to me given your concerns.

A is way too active and you'll constantly be reevaluating and changing I would bet (plus, the fact it even starts out with a "sell when stocks go up" seems to be a huge red flag to me, you're afraid of a market crash in the very near future but not gonna make any moves till things first go up?)

B is way too active and you'll constantly be reevaluating and changing I would bet (putting time specific time periods on when you're fully reinvested again seems the red flag here...at some point you're gonna start thinking that 4 years from now is actually when the crash is coming...and that you've missed all that euphoric rise before the crash that may happen and that will start effecting your plans...)

C - The only ways I;ve ever seen to make money is by working or investing, and investing sometimes just comes down to picking a risk level which has its corresponding expected reward, so whatever investments you;re considering have the same issues here, though admittedly maybe diversifying into others may be a way to lower your anxiety.


I think you need a break from this anxiety and being at a 3% SWR gives you a lot of leeway to take that break.  First maybe just try putting a ton of that portfolio into cash and bonds.  Heck, you could put 8x spending in cash and assuming that makes nothing at all (which it does not now) you're still at a 4% SWR for your investments.  Maybe having an 8 year separation between your investments and you spending them would do the trick?

If not I don't even think just cashing everything out and putting a couple years spending into a MM and the rest into treasuries (whichever gives you less anxiety, whether thats a 2 year note or a TIP or whatever) would be a bad idea, as long as you promise yourself to not think about the market or investments, etc etc for a couple years.

You need a break from all this I think, and you can afford to take one.

MustacheAndaHalf

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Re: What would you do if you were me?
« Reply #20 on: November 10, 2018, 11:24:28 AM »
People tend to remember the most vivid events, like 2008, and give them disproportional weight.  While it's possible we'll see another 100-year event like that again, it's much less likely than you expect.  I wouldn't base your plans around avoiding a repeat of the 2008 crisis.  Most crashes don't come close to -50% losses.

You might pick up investment books that use decades of stock market history.  Some books just propose theories that worked recently, but if you know you're investing based on decades of stock market data, it can also make you better prepared for corrections.  They will seem more normal, and the recovery will seem more normal as well.

MrThatsDifferent

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Re: What would you do if you were me?
« Reply #21 on: November 10, 2018, 03:17:46 PM »
Maybe you need to talk to a therapist to work through your fears and concerns?

The reality is, youíre fine but youíre panicking because you donít fully trust the process. You have over 2.5 years emergency in cash to access, which would ride out any downturn unless the world is ending and then you have bigger problems. It will go down, so what? It will come back up. You also have two other powerful options: you can reduce expenses, you can work part time doing a billion different things. You only lose when you panick and make rash decisions. Donít be that person.

You did this to enjoy your son and relax. Write those goals up, ban yourself from checking the portfolio and worrying. If you want stress back in your life, go back to work. Otherwise, get yourself together, stay calm and focused for yourself and your family and enjoy the fruits of your hard-earned labor.

mrmoonymartian

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Re: What would you do if you were me?
« Reply #22 on: November 10, 2018, 06:10:45 PM »
Historically you wouldn't go bust with buy and hold at 3% withdrawal, so any rational worry is only about the future being markedly different to the past. The past that spanned world wars, depressions, stagflations, financial crises, etc.

Do you have a fully stocked fallout shelter in your backyard? Because in the event of such an unprecedented disaster, the stockmarket is the last thing you need to worry about.