Could you handle a market meltdown

[force majeure]

Folks,

All is well with equity markets, call it recency bias. Its human nature to focus on the good times.
How many of us in the FIRE community could really handle a major and prolonged bear market?
I am talking total carnage in equity markets. Remember 2008 - 09; markets fell 50%, and dividends were cut also.
Would you be forced into doing a bum retail job to survive? Have to sell stock at distressed prices?
Theres no point saying.. I am so well diversified, everbody else would be screwed.


 

[CowboyAndIndian]

Assuming you have a CD ladder, you should get enough of time for the market to recover.

Doctor Doom has a great drawdown set of articles. (https://livingafi.com/2014/05/09/drawdown-part-1-the-basics/)

The specifics (including the CD ladder are here https://livingafi.com/2014/05/18/drawdown-part-3-strategy/

Ally bank has a step-by-step for the CD ladder https://www.ally.com/bank/cd-ladder/step-by-step.html#local=step-by-step

[Slee_stack]

I actually think its human nature to dwell on the 'bad' times.

Outside of this forum anyway...

[LAGuy]

I remember that meltdown, vividly. And the dot com meltdown. I rode them both all the way down. And back up again. In fact, it's that experience that makes me confident I can handle another one. Expect one even at some point.

I actually think it's today's Bears that don't remember those meltdowns. They have no idea what a truly "irrationally exuberant" market looks like, and the current market sure ain't it.

[Blueskies123]

Sell some bonds and buy stocks to keep my 50/50 mix

[fattest_foot]

I actually think its human nature to dwell on the 'bad' times.

Outside of this forum anyway...

I think the FIRE community might be one of the few who get really nervous when the market keeps performing consistently well, like it currently is.

[Fishingmn]

It depends?

We get 62% of our spending need from rental property so unless the rental market also collapsed (large vacancies, drastically falling rents and/or lots of evictions) I think we'd be fine. Might have to cut back on our travel budget quite a bit but there are places we could cut without "too much" pain.

[Mr.Tako]

About as ready as I'll ever be.  In fact, I've been planning for that 50% cut for a while now -- We have 6-7 years of expenses sitting cash.  We can ride out most recessions with ease.

The vast majority of our passive income comes from dividends, so even if those get cut in a deep recession we'll be fine.  No need to sell stock or chase "safer" income sources when things get rough.

I'm prepared to buy more when the time comes too!

[begood]

I guess we'll see. I took over the bill paying in 2013 and that eye-opening experience led me to Mr. Money Mustache. So though I was aware of the dot com and 2008 drops, I wasn't an active participant. My husband said, "Hang on, honey. Stay the course." and we rode them out.

Now we're older, with a kid in high school, facing college in a few years, and a 50% drop would be pretty darn painful. But we still wouldn't bail on the bottom... it's just knowing where the bottom is.

[rachael talcott]

Isn't the whole point of safe withdrawal rates that you can weather historical worst-case scenarios?  There's always the theoretical risk of something worse than what has been seen before, but you can also build in spending flexibility so that you pull less out during downturns. 

[SwordGuy]

It depends?

We get 62% of our spending need from rental property so unless the rental market also collapsed (large vacancies, drastically falling rents and/or lots of evictions) I think we'd be fine. Might have to cut back on our travel budget quite a bit but there are places we could cut without "too much" pain.

During the Great Recession there were a huge number of rental vacancies (at least here in SoCal) and rent price reductions. Lots of landlords/investors lost their places to foreclosure. So some people still might want to have some cash on hand or not be as dependant on just that form of income.

Unfortunately that recession, unlike the dot.com and other downturns, effected not just the stock market and housing market, but the rental and job markets as well. Many people were hit by the triple (quadruple?) Whammy of first seeing their portfolios drop by 50%, then their house value (including investment homes) value drop by 50%, than the rental vacancies start, than the loss of their jobs.  Good thing something like that will likely never happen in.our lifetimes again. Not that most here under 30 probably were impacted or even remember it.

We own our properties outright.  So while dropping the rents wouldn't be pleasant for our overall income, we would be ok.

We're planning on using our stock income to invest in more rentals (or stock), not to live on.   A drop in prices would just slow down our net worth increases - unless we were able to buy some stock at firesale prices.

[Lagom]

I doubt the CA market will drop nearly as sharply as it did last time when people still thought it was as overinflated as the rest of the country. It wasn't, thus historic bargains were there to be plucked. I would be extremely surprised if another housing crash did more than modestly dip CA prices, in the major metro areas anyway.

[mandy_2002]

I've left the country and my nest egg to sit for two years while volunteering with Peace Corps. Before I left, the 4% rule would have been enough to live on, and since then they've grown. If, in 17-20 months, there is a 50% pullback, I have my emergency fund and my PC readjustment allowance (about $8,000, not too shabby) that would support me for about a year. There are about 8 options for what I will do after PC, and if everything feel apart I could choose the most inexpensive or highest paying. World travel can be very cheap to some of the places I want to go, another stint in PC would be even cheaper, and going back to engineering would pay the bills and help me invest in a low point (one of my former leaders said that he would get me a job wherever he works if I ever want to come back). I just need to decide what I actually WANT to do if a market crash is not in the cards. I'm leaning towards would domination (travel).

[Metric Mouse]

Meh. Unless we're talking black-swan events, I can't forsee too much affecting me. My portfolio has been in existence through the 08-09 meltdown; it survived. I'm sure I'd have to sell some stock at a loss, but I don't see that being the end of the world. I'm in it for the long haul, and am rapidly approaching the point where my failure rate is so low that even the worst periods in history would not toss my ER into disarray.

[libertarian4321]

No reason to worry.

Trump's "got this."

Apparently the market is going to rise forever.

Or something.

[Ozstache]

My FIRE stash could withstand a 50% drop in equities without having to liquidate anything nor having to look for work. It's a much bigger drop that would concern me, due to potential civil unrest and government(s) meltdown.

[Metric Mouse]

No reason to worry.

Trump's "got this."

Apparently the market is going to rise forever.

Or something.

And if it doesn't, we can all just go work at one of those jobs he's bringing back!

[arebelspy]

I'm still a net saver in ER from real estate + side gigs, so a market slowdown or decline would benefit me in the long run.  I'd be as happy as those still a decade from FIRE.

[GuitarStv]

Isn't the whole point of safe withdrawal rates that you can weather historical worst-case scenarios?  There's always the theoretical risk of something worse than what has been seen before, but you can also build in spending flexibility so that you pull less out during downturns.

Yes.

[gman]

Yes we could handle a market meltdown because our pensions cover almost twice our expenses and we have 4.5 years of expenses in cash. We are still saving into the market  so we can just let our stash weather the storm like we did through the dot com and 08-09.

[gerardc]

We have 6-7 years of expenses sitting cash.  We can ride out most recessions with ease.

What's your algorithm to decide if you're selling stocks or relying on your cash in a given year? Whatever your answer, isn't that timing the market? (rebalancing is fine)

[Playing with Fire UK]

I'm more interested in the behavioural/emotional impacts of a long market meltdown. In the last wobble I was happy with the formula I used for rebalancing/buying in. I've now changed to buying in at the start of the financial year so I'm not sure whether I'd get twitchy and want to mess with rebalancing to take advantage of the downturn.

[Metric Mouse]

We have 6-7 years of expenses sitting cash.  We can ride out most recessions with ease.

What's your algorithm to decide if you're selling stocks or relying on your cash in a given year? Whatever your answer, isn't that timing the market? (rebalancing is fine)

How is that market timing? If one firmly believes that over time the market will go up, then it would be pretty easy to say "is the market generally up this month/year/quarter: No? - Then use cash. Yes? - sell stocks.

[gerardc]

It's a way to decide whether to buy/hold/sell depending on stock prices, which is market timing by definition. The only exception is rebalancing.

[arebelspy]

It's a way to decide whether to buy/hold/sell depending on stock prices, which is market timing by definition. The only exception is rebalancing.

Most people do use their cash buffer for rebalancing.

Also I don't see why rebalancing gets a free pass. If you say that it's because it's mechanical based on rules, you could say the same for using a cash buffer.

[force majeure]

I think the reality would be different for a lot of us.
Personally, having to watch a 500k haircut would be lifechanging. A loss on paper is a loss, no matter how you dress it up.
Cash buffer to rebalance? I am not prepared to keep large amounts in cash, 6 months expenses is my rule.

[Playing with Fire UK]

I think the reality would be different for a lot of us.
Personally, having to watch a 500k haircut would be lifechanging. A loss on paper is a loss, no matter how you dress it up.
Cash buffer to rebalance? I am not prepared to keep large amounts in cash, 6 months expenses is my rule.

I agree that the reality could be different to all the theory. I really hope that looking at all of the rebound charts would convince me that a loss is only a loss when you sell.

Do you have bonds or gold for rebalancing FM?

[oneyear]

As  approached my fire target I really got mentally cautious with my investments.

I'm sitting +30% cash right now because I don't like where the market is. From tomorrow I'll be investing (DCA'ing) again with some new introductions, but I'm keeping a massive chunk ready for a change in tides.

[Metric Mouse]

As  approached my fire target I really got mentally cautious with my investments.

I'm sitting +30% cash right now because I don't like where the market is. From tomorrow I'll be investing (DCA'ing) again with some new introductions, but I'm keeping a massive chunk ready for a change in tides.

I hope this works out well for you! Make a plan you can stick to, and follow it.

[Playing with Fire UK]

As  approached my fire target I really got mentally cautious with my investments.

I'm sitting +30% cash right now because I don't like where the market is. From tomorrow I'll be investing (DCA'ing) again with some new introductions, but I'm keeping a massive chunk ready for a change in tides.

I hope this works out well for you! Make a plan you can stick to, and follow it.

Yes, do you have an idea of what you're looking for before jumping in?

[oldtoyota]

No reason to worry.

Trump's "got this."

Apparently the market is going to rise forever.

Or something.

And if it doesn't, we can all just go work at one of those jobs he's bringing back!

Like building a wall! ;-)

[force majeure]

Yes, I have TLT, but not enough of it, unwilling to add more while the price trend is downward. I will have add money market or short dated bonds for now.

[Livingthedream55]

I'm 2 years out from FIRE (I'm 57 so not really early retirement)

Yes, I could take a 50% equity hit as I will have a defined benefit pension which will cover my basic necessities of life and will have a good cash cushion (the equivalent of 2 years of what I would like to draw from my IRA account once I FIRE) in a taxable account plus my IRAs are already set at a 50/50 mix (which is basically going to be my asset allocation for the rest of my life.)

So I could ride out 2 years of a major market downturn no problem. After that I would be open to bringing in housemates, getting a side job, etc.

[BTDretire]

Yes, I have TLT, but not enough of it, unwilling to add more while the price trend is downward. I will have add money market or short dated bonds for now.

 I'm the first to admit, I know very little about TLT, but I notice it has a 17.4 year duration.
 In these times of rising bond rates isn't it a terrible time to have a fund with that long of a duration?
Long duration funds drop much more than short duration funds.

Here's TLT, (17 year duration)  it has a 15% loss in 6 months. Yield 2.54%
https://finance.yahoo.com/quote/TLT?ltr=1

Here's DLTNX, (2.6 year duration) it has a 1.7% loss in 6 months. Yield 3.49%.

Here's DLSNX, (1.1 year duration)  it has a 0.5% loss in 6 months. Yield 2.28%.

I understand TLT is government bond fund, but how safe it it when you are down 15% in six months.

I will reiterate, if you think interest rates are on the rise, you want to own short duration bonds funds.

Only my two cents, but I hope I have learned a little over my 34 year investment life.
Not recomending those two funds, just some data I had available.

[Cassie]

With 2 pensions that equal 40k and a p.t. gig that pays 22k we would be fine.

[Metric Mouse]

No reason to worry.

Trump's "got this."

Apparently the market is going to rise forever.

Or something.

And if it doesn't, we can all just go work at one of those jobs he's bringing back!

Like building a wall! ;-)

Infastructure is important!