Something occurred to me recently that I thought I would bring up. Mustachianism looks to have really started taking root around 09 or 2010 and only picked up steam during this time. During that time, the stock market has essentially only risen (minus some minor bumps in the road on the way). What occurred to me is that some people who have been following MMM and taking his investment advice have never seen a real bear market. I know that MOST Mustachians look at bear markets as an opportunity to get more stocks at deep discounts, however there are lots of people who simply FREAK OUT when they see their account balances drop and it’s possible (likely?) that some Mustachians who feel this way. These people don’t know what it’s like to see their account value drop 20% or more.
With that in mind I figured it would be a good topic to discuss other options for people who are severely stressed out by the volatility of stocks. Here are my recommendations:
Indexed annuities. These are contracts with insurance companies that will offer you a guaranteed rate of return with the possibility getting a bonus when a certain index performs well (most commonly the S+P 500). For example: the annuity will never earn LESS than 1%, but will earn whatever gains the stock market earns up to 4.25%. They also offer the option of giving you a monthly income for live (sort of like a self funded pension). This pros of this investment are that they will NEVER lose value, they earn more than traditional savings and CDs, and they can either keep up with, or mitigate the effects of inflation. The cons of this investment are that they are VERY long term investments, usually 5-8 years. Though most will have an option to withdraw some of the funds each year, the majority of your money will be tied up for a long time and will have HUGE penalties if you pull it out early.
Short term(duration) bonds/bond funds. Bonds are traditionally more stable investments, will pay regular interest and can also see some limited principal appreciation as well. The reason I recommend short term bonds and funds is because bonds are very sensitive to changes in interest rates. The longer the term on the bond, the more sensitive they are (who would want to hold a 10 year bond at 1% when interest rates are 2-3%?). The pros of this investment is that you can get rates of return that compete fairly well with stocks over time (the returns won’t go as high, but the losses won’t go as low), you should also see less volatility (how often the value goes up and down) than with stocks. The cons of this investment are that you will still see ups and downs, also there may be limited options for indexed funds because you will be looking for short duration, so you may pay higher fees on the investment.
A few things to keep in mind: investments like this may not perform as well as stocks, or be as liquid as stocks in the long run. They will also have different tax considerations as well. Both of these factors could affect your FIRE date. Finally, these investments are terrible to get into after selling your stocks in a panic when the market is down. Do some serious soul searching and be honest with yourself about how you will feel if your investment account balance goes down 30, 40, or 50% this year. Will you be able to grit your teeth and get through it or will you be losing sleep and starting a new MMM forum thread every other day asking how to keep from selling causeohmygodIsavedsohardforthismoneyandnowimlosingitallandi’llneverretirenowandi’llhavetogobacktoeatingramennoodlesandigaveupallthoselattesandsuvridesfornothingDAMN YOU MMM!!! Phew. Don’t do that. The time to decide whether or not they are for you is now, either before investing or while the market is doing well.
