I was reading a thread somewhere and someone mentioned that they would start with a year's worth of expenses when they FIRE in case they FIRE right before a market downturn. That got me thinking, it wouldn't be enough to do that right? If you had a year's worth of expenses, the market could take a downturn right before your year supply is up.
I was thinking I'd want to have a 1 or 2 year stash and a rolling withdrawal every month to keep it up that I could skip or stop if the market turns for the worst. A flaw I see in this is that it's really timing the market. There's nothing stopping it from going down for more than a year or 2, or going down for 6 months and staying that way for 3 years.
Has anyone thought about anything like this, or is it like going into the market where you just set it and forget it and you'll end up ahead in the end?
There's been a lot of discussion about variations on this here. The short answer is that if you leave any amount in cash you will statistically have a higher rate of failure during most simulations than if you had left the whole portfolio in the market and blindly taken withdraws out at the same WR. This is due to the drag that the cash has on your returns, earning less than inflation. The more cash you have, the bigger the drag. About the only time this strategy "wins" is when the market takes a dive immediately upon retirement and doesn't rebound for many months. This happens a minority of the time ( the exact % depends on exactly how much cash you keep on hand).
What having a stash of cash does do is it gives piece of mind and keeps a person from panicking an selling more of their stocks when the market is dropping. This psychological component shouldn't be overlooked. Very few people can actually avoid emotion when it is their own portfolio.
One strategy is to have 1-2 years of liquid saving that a person can draw from whenever the market drops significantly, and then this pool of money can be replace when the market rebound. Of course, this will still trail an all-invested portfolio most of the time, but it smooths out the ride.
A final, more 'optimal' strategy for reducing volatility while only slightly reducing gains is to have a percentage of your portfolio in bonds
and then rebalance your portfolio periodically to maintain that ratio.. By doing this it "forces" an investor to "sell high, buy low" - which is just the opposite of what we tend to do naturally.
Of course, there is an even better strategy - one that uses our natural abilities to adapt to new situations. If the market drops and your portfolio goes below its starting value, make some lifestyle changes... Trim some fat, earn some money or sell a few things. We do this our whole working careers naturally when economic hardships strike, and a 5 or 10% adjustment can have a huge positive effect while flexing our frugality muscles and actually making us a bit stronger.
