Author Topic: How long before you recovered from 2008 recession losses? How much cash to hold?  (Read 2616 times)

EconDiva

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I really thought there was a thread on this somewhere but I didn't see one...

I am interested in knowing how long it took you to recover financially from the 2008 recession?

Having been through 08, how does this impact how much cash you plan to hold in retirement?  My understanding is having the proper cash buffer is critical during retirement years during times of recession so that one is not having to increase their withdrawal rate thereby impacting the duration of time their retirement funds will last.

I've heard people planning to go into retirement years with 6 months to a year of cash and others with 2, 3 or even 5 years of cash.  Interested to hear from those here...
« Last Edit: December 13, 2019, 09:19:27 AM by EconDiva »

the_gastropod

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It seems to be increasingly popular to use a rising glide path strategy, where one retires with a high allocation to bonds, and slowly decreases that, moving more into equities over time. This type of strategy theoretically mitigates the sequence of return risk in the early years of your retirement.

Laserjet3051

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financial recovery from 2008 is quite a different beast from emotional/psychological recovery from the same time period. While some folks may have recovered with respect to the former, the scars of the latter may well impact their behavior with cash reserves for the remainder of their life. Which were you inquiring about?

EconDiva

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financial recovery from 2008 is quite a different beast from emotional/psychological recovery from the same time period. While some folks may have recovered with respect to the former, the scars of the latter may well impact their behavior with cash reserves for the remainder of their life. Which were you inquiring about?

Excellent point as I was only thinking about the financial side of things so was wondering from a timing perspective how long it took before people's portfolios bounced back.  That is what I was most interested in, however, I would love to also hear about the timing for psychological recovery from those who wish to share...

Cranky

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It took a few years, but not that many. It was not all that traumatic, but our jobs were secure.

mistymoney

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I also maintained my job, and without any undue insecurity with the job either. There were layoffs unfortunately, but I was not affected and my job function was serving clients - none of who left, so I was not overly worried.

I remember feeling a bit gut-punched about the value and thinking about everything I could have used the money for besides investing it! But I was also able to marshal myself and throw some extra money into the market, and that helped down the road. As for recovery of capital - I don't even remember. The bottom dropped out, I threw extra in, and I didn't really pay attention from there.

Are there any on the board who were recently retired at that time? Are their tales noted anywhere? I think hearing from them would be informative.

BECABECA

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frugal_c

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If you exclude new investment we didn't recover until 2013 iirc.

I don't think it affects anything as far as my cash buffer. I will probably hold 30% in retirement.

MayDay

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We didn't holistically track NE at that point but I'd say about 5 years.

Emotionally, 10. Maybe still for my H.

We lost about 4 jobs between us and had to move country to get jobs. We were never negative NW thanks to our savings, but we lost ~60k on our house and came close to running out of money a few times. And the longest stretch of unemployment was a year.

It was no joke.

We are both engineers- but my H worked in a construction related area so his whole industry got hit HARD.

nancyfrank232

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I bought stock and US property during the great financial crisis so it taught me that having cash handy during a downturn leads to really good outcomes

The best way to recover from a downturn is to buy into it

EscapeVelocity2020

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There's a thing called 'survivor-ship bias', probably relevant to be aware of.  I did fine in the Great Recession downturn, mostly applying learnings from the dot-com bust in the 2000's that really got me.  Probably why I'm here on a FIRE forum feeling pretty good about how the economic system has worked out for me and confident that I'll survive whatever comes next...  Every growth cycle needs a shakeout to ensure folks don't over-leverage and take on too much debt, this next shakeout is going to be a doozy (as we are in a historic bull market).  It is what it is.  But I'd love to take a side bet that folks are nowhere near as prepared as they think they are to watch their balances fall day after day...  The hubris of folks asking for stocks to fall sometimes worries me around these parts.

norajean

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Why is the 2008 recession relevant?  Are you imagining the next crash will be the same?

MayDay

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I bought stock and US property during the great financial crisis so it taught me that having cash handy during a downturn leads to really good outcomes

The best way to recover from a downturn is to buy into it

But doesn't that assume you have a job? We had cash saved too- that's why we could eat and pay our mortgage during years of u employment. We held our cash- if we'd used it to buy stock we'd have been in a seriously bad position.

Because of that well continue to hold our cash for emergencies in the next recession.

2sk22

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We were quite fortunate - neither of us lost our jobs although there was a a close call for me in 2009. Several people in my team were laid off but I somehow escaped. Partly due to the memories of this time, we do keep more cash on hand than most.

We kept our 401Ks maxed out and never stopped our automated post-tax investing even during the worst of the dips. I was looking at my 401K statement during that period and I saw that it had mostly recovered by late 2009.

mistymoney

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I bought stock and US property during the great financial crisis so it taught me that having cash handy during a downturn leads to really good outcomes

The best way to recover from a downturn is to buy into it

But doesn't that assume you have a job? We had cash saved too- that's why we could eat and pay our mortgage during years of u employment. We held our cash- if we'd used it to buy stock we'd have been in a seriously bad position.

Because of that well continue to hold our cash for emergencies in the next recession.

This is the important piece - and the question raised by the OP.

But it's also a non-market dependent question - because ill-fortune can hit anyone at anytime. If you aren't FI or close to it, unexpected and prolonged unemployment will hit you hard.

So - plan for unemployment/no income and a sudden 50% devaluation of stocks - and a big slide on RE values. What would you wish you'd done leading up to that?

The companion question is what opportunity costs are you willing to pay for that level of security? ie keeping money out of the market.

It's a tough call - and it always is a tough call - whether the market drops or not. Risk and reward isn't always about just tolerance to falling balances - the risk part can include shelter and food insecurity if multiple economic hits occur.
« Last Edit: December 14, 2019, 07:54:40 AM by mistymoney »

OtherJen

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Financially? We havenít fully recovered. Our home value is still about 20% under what we paid back in 2003. We were underwater on our mortgage until maybe 3 years ago (and we donít have a big mortgage). We were grateful that frugality allowed us to keep our home when my husband lost his job for several months during the recession. We werenít able to sell that home and move when I finished school and we couldnít rent it for enough to cover the mortgage and maintenance, so I definitely lost out on job opportunities out of state.

Emotionally? I donít know. Iím somewhat risk-averse by nature, but the recession made it worse. Logically, I know weíre in a better place to ride out a recession now, but I find it hard to be gleeful at the prospect of cheap stocks. I watched too many people suffer last time.

Greystache

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Here is a link to a really good piece regarding how long it takes to recover from a bear market. (spoiler alert: it's way longer than you think).
 https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

When I was working, I never stopped contributing to my retirement accounts during bear markets. During the last one in 2008-2009, I took a serious hit even though may asset allocation was 60/40. My home equity also took a serious hit (the southern California housing market tanked). I had planned to retire in 2015 and thought I would have to delay my plans but I never stopped contributing to my 401K and by the time I got to 2015, I was ready to retire.

Bear markets never bothered me when I was working and saving. I was always buying and a bear market meant stocks were on sale.  I have yet to experience a bear market in retirement. It is going to feel very different.  My asset allocation is now only 50% equities so I have a lot in bonds and cash at the moment.

frugal_c

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It also depends on where you invest. The US has done great but the rest of the world?  Not so much.  My wife's account used a split between Canada USA and international. The non us investments are maybe a touch ahead of inflation, 12 years later.  If we had been doing 4% on those returns we would be in really bad shape.

TempusFugit

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I bought stock and US property during the great financial crisis so it taught me that having cash handy during a downturn leads to really good outcomes

The best way to recover from a downturn is to buy into it

But doesn't that assume you have a job? We had cash saved too- that's why we could eat and pay our mortgage during years of u employment. We held our cash- if we'd used it to buy stock we'd have been in a seriously bad position.

Because of that well continue to hold our cash for emergencies in the next recession.

This is the important piece - and the question raised by the OP.

But it's also a non-market dependent question - because ill-fortune can hit anyone at anytime. If you aren't FI or close to it, unexpected and prolonged unemployment will hit you hard.

So - plan for unemployment/no income and a sudden 50% devaluation of stocks - and a big slide on RE values. What would you wish you'd done leading up to that?

The companion question is what opportunity costs are you willing to pay for that level of security? ie keeping money out of the market.

It's a tough call - and it always is a tough call - whether the market drops or not. Risk and reward isn't always about just tolerance to falling balances - the risk part can include shelter and food insecurity if multiple economic hits occur.

I did well during the downturn as it coincided with a lucrative freelance project that provided the psychological comfort of a second income stream as my corporate gig was less secure. We had salary reductions across the board and layoffs in Ď09.  I kept my job and maxed out my retirement contributions, but i did hoard cash. 

This idea of having cash on hand in case of the next crash cost me quite a bit in opportunity cost.  It was only a couple of years ago that i finally moved most of that cash into the market. I also put some toward my mortgage, again trying to play it safe.  I figure it cost me about $50k or so in forgone appreciation to be so cautious over those years. 

Now i only keep about 15k in cash equivalents down from >$100k a few years ago.  Of course, i also have a much higher investment account balance today, which provides a level of comfort since i could, in extremis, sell after tax investments and support myself for a few years even after an Ď08 style drop. 

My current investment balance would drop about 27% I think if we had an exact repeat of the Ď08 crash.  I am a pretty conservative investor, having something like 70/30 AA. 

habanero

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If you are still in the accumlulation phase it doesn't really matter that much what the market does as long as you are able to keep your job. The job will cover the monthly expenses so there is no need  to sell into a bear market unless some panic attack strikes. Its when people have high-ish fixed expenses / lifestyle and loose their jobs things get hairy quickly. If you cost base is low and you don't have an expensive lifestyle than almost any job will provide sufficient cashflow to get by. This is and has been the sole reason why I don't have a big mortgage or anything else requiring me to have a very high-paying job to provide for my rather modest lifestyle. If I miss out on some housing market gains by being underleveraged or whatever I don't care. I go to bed every night knowing if I loose my high-paying job tomorrow we're gonna be just fine. My SO works for the government and will never get fired, which adds another level of safety to it.

You should always have cash or near-cash at hand. How much varies according to a lot of factors but I want to have at least a couple of years of living expenses available in bonds, CDs, a savings account with meaningful yield or whatever. It doesn't have the highest expected return, but it does provide a safety net and when the shit hits the fan might help in not doing something stupid, like selling stocks into a massive bear market. It's a lot easier to not sell when you know you are fine for the next few years anyway. If I loose my job I will be entitled to government benefits that would be enough to cover my daily life, but those will eventually wear out so I like to have some extra safety on hand. It would be quite easy to tighten the belt a couple of notches if needed as we have a pretty comfy, but reasonable lifestyle at the moment.

If my index funds were to drop by 20, 30 or 60% I know we will still be fine. And that is worth a lot to me.

I might be wrong, but I think that when the market tanks the next time it will be very, very ugly. I do believe the market will deliver decent returns in the long run, but I firmly believe that the last 10+ years massive bull market has made a lot of people overconfident in that market's ability to deliver the goods.

FIRE 20/20

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In terms of assets, we hit a high about 17 May 2008.  Our low was about 7 March 2009.  Our losses were in the 6 figure range, so it was a bit stomach churning to see it all happen.  We exceeded our 17 May 2008 numbers about 25 September 2009, so it took us about 18 months to "recover".  However, we kept both of our jobs during the downturn and didn't really worry about ourselves very much.  I was worried that as a society things would get a lot worse.  It's hard to convey now, but those felt like very dark times.  We stuck to the plan and everything worked out great for us, but I realize how fortunate we were. 

The recession definitely helped increase my risk tolerance, however.  There's a reason it was called the Great Recession; it was pretty bad.  Despite that, sticking to the plan and maintaining a very high percentage of equities worked great because we didn't have to sell.  I figure that since we made it through that without deviating from the plan and without freaking out about our asset allocation, I have a lot more confidence that we'll survive the next one.  If the next one is a lot worse than 2008/2009, then my guess is that we'll be more concerned with hoarding canned goods and water than when our account balances will recover.  And if it's "only" as bad as that one was then we'll be ok even without any work income. 

spartana

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Probably about 3 years for investments and much longer for house values to increase (bought cheap with cash during the down turn so not a problem). I was already FIREd but had very low basic/barebone expenses and enough cash in laddered CDs and bonds to cover those expenses for approx 3 years at $10k or less per year. So didn't need to do anything but cut discretionary spending for awhile. Just left investments untouched.

Sadly almost everyone I knew (mid 30s to mid 40s) lost everything - jobs, investments, houses - and haven't really recovered. All were working and dependent on their high incomes (most dual high incomes) and had young kids and big mortgages (with big home equity loans on top), big car loans for the fancy new clown car luxury mobiles, and big consumer debt from living an upscale life. Most (all?) went down hard and litterally lost it all.

GoCubsGo

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I bought into the recession (bought rental homes) which greatly cushioned any losses as I bought foreclosed homes for large discounts to current value.  I was also able to charge really strong rents (because of the many unfortunate people who lost their jobs and homes but were able to afford a rental house once they found employment).  I have quite a bit of cash sitting in CD's now (the most I've had in years).  I'm waiting for the  next recession and I will likely buy again.  We were fortunate as our income was stable and our expenses were under control which allowed us to take advantage of the recession.

Laura33

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I have no idea.  I didn't pay attention to how much I lost, so I also didn't pay attention to how quickly/slowly it came back.  OTOH, we were able to buy our retirement condo out of foreclosure, for about $100K off.  So overall, we are better off as a result, because we didn't sell off when the crash hit.

I really think there are two separate issues here:  (1) how much you need as a safety cushion if you are still working; and (2) how much cash you need on-hand when you retire to ride things out.

On (1), I do think people underestimate how interrelated the different markets are.  In the first tech crash, DH lost his job when his plant shut down; we then had to move for him to find a new job but couldn't sell our house, because the tech crash had put a lot of people on the street, and so the real estate market crashed, too.  I have always been a big fan of low mandatory expenses, living on one income, and having a big EF, but that couple of years persuaded DH that I wasn't crazy after all.

On (2), there are different ways to handle it.  Some people set an asset allocation (80/20, 60/40), and stick with it; some people start more aggressive and go more conservative over time; some people do it the other way.  Me, I plan to have about 3-5 years' planned expenses in CDs or individual bonds, a side fund for capital costs (e.g., new roof, new car), and everything else 100% in stocks.  I also have a generous budget, so there is a lot I can cut back on for a couple of years if the market stays down longer than I thought. 

I don't know which approach will be the most profitable.  But I don't need the "best" -- really, why do I care if my heirs inherit a little more or little less?)  I just need to make sure that I have a plan that maximizes my chances of not running out of money.  Since my two biggest risks are (a) inflation risk and (b) having to sell low to cover costs, this approach makes me feel the most comfortable that I can navigate those two risks successfully.   

Frugal Lizard

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We are still recovering.  H lost his job and was unemployed for 20 months.  During that time there was not a single job advertised in his field.  He started retraining in a different field with the plan being to apply for jobs in old field and new field and go with whatever came along first.  He got a starter job in his new field and it took seven years to get back up to his old salary.  His raise this year - 10.5 years post layoff, is 154% of what he was earning at layoff.  This new field has way more growth potential and is much more resilient.  His old field has pretty much collapsed permanently. 

We were ok because we were in a pretty solid financial position prior, but definitely it seriously impacted our nest egg because we weren't saving any money until two years ago.  We had so much deferred spending (cars, 2004 and 2005 were nearly new in 2009 but by 2014 are needing some repairs, furnace, appliances).  Maybe we would be in a better place now if we haven't moved house, maybe not.  Our current house was a kinda of crazy stretch for us in 2010 but we needed to get out of the neighborhood (becoming a student ghetto and we were struggling with the noise and parties).  The new house has been sucking up a lot of our income growth with deferred maintenance but at the same time it has been appreciating at a faster rate than the old house is.  Would our investment accounts be in a much better place?  For sure.  Mentally would we be in a better place without the stress? - for double sure.   But without discovering MMM we would probably be nowhere near where we will be in two more years of both of us earning good money and saving a huge chunk of it.